Question
From the following information, calculate interest coverage ratio and give your comments also:
✓
Answer
Interest Coverage Ratio $=\frac{\text{Net profit before Interest & Income Tax}}{\text{Fiixed Interest Charges}}$
In the above question net profit after interest and tax is given, whereas net profit before interest and tax is required to calculate this ratio.
If profit after tax is 50, the profit before tax must be = 100
If profit after tax is 1,20,000, the profit before tax must be
$=\frac{100}{50}\times1,20,000=₹\ 2,40,000$
Interest paid on ₹ 1,00,000 debentures during the year at the rate of 15% amounts to ₹ 15,000 and on ₹ 1,00,000 mortgage loan at the rate of 12% amounts to ₹ 12,000.
Therefore, profit before payment of interest and tax = ₹ 2,40,000 + ₹ 27,000 (Interest) = ₹ 2,67,000.
Interest Coverage Ratio $=\frac{₹\ 2,67,000}{₹\ 27,000}=9.89 \text{ Times}.$
In the above question net profit after interest and tax is given, whereas net profit before interest and tax is required to calculate this ratio.
If profit after tax is 50, the profit before tax must be = 100
If profit after tax is 1,20,000, the profit before tax must be
$=\frac{100}{50}\times1,20,000=₹\ 2,40,000$
Interest paid on ₹ 1,00,000 debentures during the year at the rate of 15% amounts to ₹ 15,000 and on ₹ 1,00,000 mortgage loan at the rate of 12% amounts to ₹ 12,000.
Therefore, profit before payment of interest and tax = ₹ 2,40,000 + ₹ 27,000 (Interest) = ₹ 2,67,000.
Interest Coverage Ratio $=\frac{₹\ 2,67,000}{₹\ 27,000}=9.89 \text{ Times}.$
Need a full question paper?
Generate a complete, print-ready paper with questions like this in minutes — across 16+ boards, with answer keys.
Explore more
Similar questions
State any three requirements which should be considered before making an investing decision to choose between 'Desktop database' or 'Server database'.
Classify the following transaction as Operating Activities for a finanical company and a non-financial company:
- Purchase of shares on a stock Exchage.
- Dividend received on Shares.
- Dividend paid on shares
- Loans given.
- Loans takes.
- Interest paid on borrowings.
X Ltd. purchased assets of ₹ 8,00,000 and liabilities of ₹ 1,00,000 from Y Ltd. on 1.4.2018. ₹ 2,00,000 were paid immediately and the balance was paid by issue of ₹ 4,75,000, 10% debentures in X Ltd. Give journal entries in the books of X Ltd.
From the following ascertain Debt - Equity Ratio:
In a company, rate of Gross Profit on cost is 20%. Its Gross Profit is ₹ 4,00,000. Current Liabilities are 50% of the Current Assets, and Current Assets are ₹ 12,00,000. Calculate the Working Capital Turnover Ratio.
X Ltd. has a current ratio of 3 : 1 and quick ratio of 2 : 1. If the excess of current assets over quick assets as represented by stock is ₹ 40,000, calculate current assets and current liabilities.
Shiva Ltd. issued 1,00,000 Equity Shares of ₹ 10 each at a premium of ₹ 5 per share. The whole amount was payable on application. The issue was fully subscribed. Pass necessary Journal entries.
A firm had current assets of ₹ 7,20,000. It then purchased goods for ₹ 30,000 on credit. After this purchase, the current ratio was 3 : 1. Ascertain the amount of Current Liabilities and Working Capital after the purchase
R.Ltd. offered 20,00,000, 10% Debenture of ₹ 200 each at a discount of 7% redeemable at premium of 8% after 9 years. Record necessary entries in the books of R. Ltd.
Quick Ratio 2.2; Current Assets ₹ 40,000; Inventory ₹ 32,000. Calculate Current Assets.