From the following data calculate Interest Coverage Ratio.
i. 12% Debentures - ₹10,00,000
ii. Net Profit after tax - ₹60,000
iii. Tax rate - 40%
Answer & explanation
Correct answer: option 3
The correct answer is option 3- 1.83 times.
Net profit after tax = 60,000
Tax rate = 40% means ₹60,000 PROFIT IS 60%
60% = 60,000
100% = 60,000/60 X 100
= 1,00,000
Net profit before tax = 1,00,000
Interest on debentures = 12% of 10,00,000
= ₹1,20,000
Net Profit before interest and Tax = Net profit before tax + interest on debentures
= 1,00,000 + 1,20,000
= 2,20,000
Interest Coverage Ratio = Net Profit before interest and tax / Interest on Long-term Debts
= 2,20,000/ 1,20,000
= 1.83 times