Sharma Ltd. has 9% debentures of Rs. 20 lakh and a 12% bank loan of Rs. 15 lakh. Its earnings before interest and taxes (EBIT) are Rs. 18 lakh.
What is its interest coverage ratio?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → 5 times
Given:
9% Debentures = Rs. 20 lakh
12% Bank loan = Rs. 15 lakh
EBIT = Rs. 18 lakh
ICR = EBIT ÷ Interest
Interest on debentures = 9% of Rs. 20 lakh = Rs. 1.8 lakh
Interest on bank loan = 12% of Rs. 15 lakh = Rs. 1.8 lakh
Total interest = 1.8 + 1.8 = Rs. 3.6 lakh
ICR = 18 ÷ 3.6 = 5 times
Option (1) 0.51 times — Incorrect. Here EBIT is divided by the total debt: 18 ÷ 35. ICR divides by the interest.
Option (2) 4 times — Incorrect. Here the interest is first taken out of EBIT: 14.4 ÷ 3.6. ICR uses earnings before interest.
Option (4) 10 times — Incorrect. Only the debenture interest is taken: 18 ÷ 1.8. The interest on the bank loan is left out.
NCERT (2026-27 Edition):
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