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 $Rs.1,00,000$.

Answer 1

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

Let Net Profit before tax be x

Net profit before tax = Net Profit after tax + Tax

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

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

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

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

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

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