Question

From the following,Calculate interest coverage ratio:
15% Debenture: Rs 5,00,000
Net profit after tax: Rs 1,20,000
Rate of tax: 40%

Answer 1

$$\begin{gathered} \mathrm{Net}\mathrm{Profit}\mathrm{after}\mathrm{tax}=\mathrm{Rs}1,20,000 \\ \mathrm{Interest}=\mathrm{Rs}75,000 \\ \mathrm{Tax}\mathrm{rate}=40\% \\ \mathrm{Interest}\mathrm{Coverage}\mathrm{Ratio}=\frac{\mathrm{Net}\mathrm{Profit}\mathrm{before}\mathrm{Interest}\mathrm{and}\mathrm{Tax}}{\mathrm{Interest}} \\ \mathrm{Net}\mathrm{Profit}\mathrm{before}\mathrm{Tax}=\frac{1,20,000}{60}\times 100=2,00,000 \\ \mathrm{Net}\mathrm{Profit}\mathrm{before}\mathrm{Tax}\mathrm{and}\mathrm{Interest}=\mathrm{Net}\mathrm{Profit}\mathrm{before}\mathrm{Tax}+\mathrm{Interest} \\ =2,00,000+75,000=\mathrm{Rs}2,75,000 \\ \mathrm{Interest}\mathrm{Coverage}\mathrm{Ratio}=\frac{2,75,000}{75,000}=3.67\mathrm{times} \end{gathered}$$