From the following details, calculate interest coverage ratio:
Net Profit after tax ₹1,80,000; 15% Long-term debt ₹20,00,000; and Tax rate 40%.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → 2 times
Interest coverage ratio = Net profit before interest and tax ÷ Interest on long-term debt. The profit given is after tax, so it is first taken back to profit before tax, and then interest is added.
Net profit before tax:
= ₹1,80,000 × 100/(100 − 40)
= ₹3,00,000
Interest on long-term debt = 15% of ₹20,00,000 = ₹3,00,000
Net profit before interest and tax = ₹3,00,000 + ₹3,00,000 = ₹6,00,000
Interest coverage ratio:
= ₹6,00,000 ÷ ₹3,00,000
= 2 times
NCERT (2026-27 edition):
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