From the following details calculate interest coverage ratio.
Net profit after tax ₹1,20,000
10% long term Debt ₹20,00,000
And tax rate is 40%
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) - 2 times.
Interest on long term debts = 20,00,000 x 10/100
= ₹2,00,000
Profit after tax = ₹1,20,000
Tax rate = 40%
Profit before tax = 1,20,000 x 100/60
= ₹2,00,000
Profit before interest and tax = profit before tax + interest on debts
= 2,00,000 + 2,00,000
= ₹4,00,000
Interest Coverage Ratio = Net Profit before Interest and Tax / Interest on long-term debts
= 4,00,000/2,00,000
= 2 times