Question

Net Profit before Interest and Tax is ₹ 10,00,000, and 10% of Long-term Borrowings is ₹ 20,00,000. Calculate the Interest Coverage Ratio.

Answer 1

Calculation of Interest on Long-term Borrowings:

\[\text{Interest} = \text{Long-term Borrowings} \times \text{Rate of Interest}\]

$$\text{Interest} = ₹ 20,00,000 \times \frac{10}{100}$$

$${\text{Interest} = ₹ 2,00,000}$$

Calculation of Interest Coverage Ratio:

$$\text{Interest Coverage Ratio} = \frac{\text{Net Profit before Interest and Tax (EBIT)}}{\text{Interest Expense}}$$

$$\text{Interest Coverage Ratio} = \frac{10,00,000}{2,00,000} = 5$$

Interest Coverage Ratio = 5 Times