What will be interest Coverage Ratio, when 20% Long term Debt is ₹10,00,000, Tax Rate 40% and Net profit After Tax is ₹6,00,000.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → 6 Times
Interest Coverage Ratio = Net Profit before Interest and Tax ÷ Interest on long-term debt. It shows how many times the profit covers the fixed interest charge.
Net profit before tax = ₹6,00,000 ÷ (1 − 0.40) = ₹10,00,000
Interest = 20% × ₹10,00,000 = ₹2,00,000
Net profit before interest and tax = ₹10,00,000 + ₹2,00,000 = ₹12,00,000
Interest Coverage Ratio = ₹12,00,000 ÷ ₹2,00,000 = 6 times
Dividing the profit after tax by the interest gives only 3 times; the tax and the interest must both be added back first.
NCERT (2026-27 edition):
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