Question

Key figures for Apple and Google follow.

	Apple											Google
$ millions	Current Year			One Year Prior				Two Years Prior				Current Year			One Year Prior			Two Years Prior
Net income	$	48,351			$	45,687		$	53,394				12,662			19,478			16,348
Income taxes		15,738				15,685			19,121				14,531			4,672			3,303
Interest expense		2,323				1,456			733				109			124			104

Required:
1. Compute times interest earned for the three years' data shown for each company.
2. In the current year, and using times interest earned, which company appears better able to pay interest obligations?
3. In the current year, and using times interest earned, is the company in a good or bad position to pay interest obligations for (a) Apple, and (b) Google? Assume an industry average of 10.

Compute times interest earned for each of the three years shown. (Round your answer to 2 decimal places.)

	Current Year One Year Prior Two Years Prior Apple—Times interest earned Google—Times interest earned

Answer 1

Answer to Requirement 1:

Apple:

Current Year:

Times Interest Earned = Earnings before Interest and Taxes / Interest Expense
Times Interest Earned = (Net Income + Income Taxes + Interest Expense) / Interest Expense
Times Interest Earned = ($48,351 + $15,738 + $2,323) / $2,323
Times Interest Earned = 28.59

One Year Prior:

Times Interest Earned = Earnings before Interest and Taxes / Interest Expense
Times Interest Earned = (Net Income + Income Taxes + Interest Expense) / Interest Expense
Times Interest Earned = ($45,687 + $15,685 + $1,456) / $1,456
Times Interest Earned = 43.15

Two Years Prior:

Times Interest Earned = Earnings before Interest and Taxes / Interest Expense
Times Interest Earned = (Net Income + Income Taxes + Interest Expense) / Interest Expense
Times Interest Earned = ($53,394 + $19,121 + $733) / $733
Times Interest Earned = 99.93

Google:

Current Year:

Times Interest Earned = Earnings before Interest and Taxes / Interest Expense
Times Interest Earned = (Net Income + Income Taxes + Interest Expense) / Interest Expense
Times Interest Earned = ($12,662 + $14,531 + $109) / $109
Times Interest Earned = 250.48

One Year Prior:

Times Interest Earned = Earnings before Interest and Taxes / Interest Expense
Times Interest Earned = (Net Income + Income Taxes + Interest Expense) / Interest Expense
Times Interest Earned = ($19,478 + $4,672 + $124) / $124
Times Interest Earned = 195.76

Two Years Prior:

Times Interest Earned = Earnings before Interest and Taxes / Interest Expense
Times Interest Earned = (Net Income + Income Taxes + Interest Expense) / Interest Expense
Times Interest Earned = ($16,348 + $3,303 + $104) / $104
Times Interest Earned = 189.95

Answer to Requirement 2:

Google appears to be better to pay its interest obligations.

Answer to Requirement 3:

Both companies are in good position to pay their interest obligations.