Kapoor Ltd. has issued 10% debentures of Rs. 40 lakh. It has no other debt. Its earnings before interest and taxes (EBIT) for the year are Rs. 16 lakh.
What is its interest coverage ratio?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → 4 times
Given:
Debentures = Rs. 40 lakh at 10% p.a. (no other debt)
EBIT = Rs. 16 lakh
Interest coverage ratio (ICR) = EBIT ÷ Interest
Interest = 10% of Rs. 40 lakh = Rs. 4 lakh
ICR = 16 ÷ 4 = 4 times
Option (1) 0.4 times — Incorrect. This divides EBIT by the amount of debentures instead of the interest: 16 ÷ 40 = 0.4.
Option (2) 3 times — Incorrect. This takes the interest away from EBIT first: (16 − 4) ÷ 4 = 3. ICR uses EBIT, before interest.
Option (4) 5 times — Incorrect. This adds the interest to EBIT: (16 + 4) ÷ 4 = 5.
EBIT covers the interest four times, so the risk of failing to pay interest is low.
NCERT (2026-27 Edition):
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