On the basis of the passage given below, Answer the questions.

Aval Ltd. is engaged in the business of the export of canvas goods and bags. In the past, the performance of the company was above expectations. In line with the latest demand in the market, the company decided to venture into leather goods for which it required specialized machinery. For this, the Finance Manager Prabhu prepared a financial blueprint for the organization's future operations to estimate the amount of funds required and the timings with the objective to ensure that enough funds are available at the right time. He also collected the relevant data about the profit estimates for the coming years. By doing this, he wanted to be sure about the availability of funds from the internal sources of the business. For the remaining funds, he is trying to find alternative sources from outside. The company is willing to go for a public issue of shares and debentures to be made under SEBI guidelines. Public issue of shares and debentures requires considerable outlay of funds too. Due to extensive operations, the manager is of the viewpoint that a company may have to ensure that earnings before interest and taxes of a company should cover the interest obligation. The manager also felt that the cash profits generated by the operations need to be compared with the total cash required for the service of the debentures and the preference share capital.

Which financial ratio will establish the relation between the cash profits generated by the operations and the total cash required for the service of the debentures and the preference share capital?

Debt Service Coverage Ratio

The correct answer is Option 2: Debt Service Coverage Ratio

The DSCR is a measure of a company's ability to use its operating income to cover its debt payments. It is more comprehensive than the Interest Coverage Ratio because it includes both the interest and the principal repayment obligations. The passage states that the manager wants to compare the "cash profits generated by the operations" with the "total cash required for the service of the debentures and the preference share capital." This "service" includes both the fixed interest on debentures and any required dividend payments on preference shares, making the DSCR the most appropriate ratio for this analysis.