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Times Interest Earned = Net Income + Interest Expense + Income Tax Expense) + Interest Expense Note: Income Tax Expense is commonly referred to as
Times Interest Earned = Net Income + Interest Expense + Income Tax Expense) + Interest Expense Note: Income Tax Expense is commonly referred to as Provision for Income Taxes This ratio measures the risk of bankruptcy due to failure to pay interest. It provides the creditors of a company an indication of how many "times" greater earnings are than interest expense. A company's earnings (which measures profitability) provide an indication of its ability to generate cash from operations in the current year and in future years, and its cash that will be used to make interest payments. The higher a company's earnings relative to its interest expense, the more likely it will be able to make current and future interest payments. Since Interest is an expense that is subtracted to determine Net Income, we need to add interest expense back to net income. Also, since interest expense is deductible for tax purposes, we also need to add back income tax expense to measure the relevant earnings before the effect of interest and taxes. Which of the following four companies has the lowest Times Interest Earned Ratio? O Amazon.com (for the year ended Dec 31, 2021) O CVS Health Corporation (for the year ended December 31, 2021) O The Home Depot, Inc. (for fiscal 2021) O Walmart Inc. (for the year ended January 31, 2022)
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