Question

Assertion (A): Interest Coverage Ratio is a measure of security of interest payable on long-term debts.

Reason (R): Interest Coverage Ratio expresses the relationship between profits available for payment of interest and the amount of interest payable.

In the context of the above two statements, which of the following is correct?

Options

• Both (A) and (R) are correct and (R) is the correct reason of (A).

• Both (A) and (R) are correct, but (R) is not the correct reason of (A).

• Both (A) and (R) are incorrect.

• (A) is correct, but (R) is incorrect.

Answer 1

Both (A) and (R) are correct and (R) is the correct reason of (A).

Explanation:

The Interest Coverage Ratio measures how safely a company can pay interest on its long-term debts. It illustrates the link between profit before interest and tax (PBIT) and interest payable. As a result, both assertion and reasoning are correct, and reasoning correctly explains assertion.