To calculate interest coverage ratio; steps followed will be
Net Profit after tax Rs. 60,000; 12% Long-term debt 20,00,000; and Tax rate 40%.
(A) Calculate Net Profit before tax
(B) Divide Net Profit before Interest and Tax by Interest on long-term debt
(C) Calculate Net profit before interest and tax
(D) Calculate Interest on Long-term Debt
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is option 1- (A), (D), (C), (B).
(A) Calculate Net Profit before tax- Firstly calculate the net profit before tax by using net profit after tax and tax rate.
(D) Calculate Interest on Long-term Debt- After calculating the net profit before tax, we will calculate the interest on long term debt.
(C) Calculate Net profit before interest and tax- Deduct the interest from the net profit before tax.
(B) Divide Net Profit before Interest and Tax by Interest on long-term debt- Apply the formula of interest coverage ratio i.e. Net Profit before Interest and Tax/Interest on long-term debts