Practicing Success
Practicing Success
CUET Preparation Today
Rahul is a CFO of Narayan Limited. His company required funds for future expansion. He has both the options of raising funds through Debt or equity. So, he asks his Finance Manager Tarun to calculate ICR of the company in order to choose Debt as the source of finance. Determine the formula, Tarun is going to use for the Computation. |
$ICR=\frac{Debt}{Debt+Equity}$ $ICR=\frac{\text{Profit after tax}}{\text{Preference Dividend}}$ $ICR=\frac{EBIT}{Interest}$ $ICR=\frac{EBIT}{\text{Non cash expenses}}$ |
$ICR=\frac{EBIT}{Interest}$ |
The correct answer is option (3) : $ICR=\frac{EBIT}{Interest}$ The interest coverage ratio is calculated by dividing earnings before interest and taxes (EBIT) by the total amount of interest expense on all of the company's outstanding debts. A company's debt can include lines of credit, loans, and bonds.
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