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.
Net Profit after tax = ₹1,80,000
Tax rate = 40%
Net Profit after tax is 60%
Net profit before tax (100%) = 1,80,000/60 x 100
= 3,00,000
15% Long-term debt = ₹20,00,000
Interest = 20,00,000 x 15/100
= 3,00,000
Net Profit before Interest and Tax= Net profit before tax + Interest
= 3,00,000 + 3,00,000
= 6,00,000
Interest coverage ratio = Net Profit before Interest and Tax / Interest on long-term debt
= 6,00,000/3,00,000
= 2 times