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Question

From the following information calculate Interest Coverage Ratio :Net profit after interest and tax $$Rs.1,20,000$$; Rate of income tax $$40\%$$; $$15\%$$ debentures $$Rs,1,00,000$$; $$12\%$$ Mortgage loan $$Rs. 1,00,000$$.


Solution

Interest Coverage Ratio = $$\dfrac{\text{Net profit before Interest and Tax}}{\text{Interest On debt}} =\dfrac{2,27,000}{27,000} = 8.40$$ times

Let Net Profit before tax be x

Net profit before tax = Net Profit after tax + Tax

$$x=1,20,000+\dfrac{40}{100}x$$

$$\dfrac{60}{100}x=1,20,000$$

$$x=1,20,000\times \dfrac{100}{60} = 2,00,000$$

Interest on Debenture = $$1,00,000 \times \dfrac{15}{100} = Rs. 15,000$$

Interest on Mortgage Loan = $$ 1,00,000 \times \dfrac{12}{100} = Rs. 12,000$$

Net profit before interest and tax = $$2,00,000+15,000+12,000 = 2,27,000$$


Accountancy

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