Question

Calculate Interest Coverage Ratio and Rate of Interest on Bank Loan from the following information:

(i) Bank Loan (Assume the only debt of the company)	₹ 50,00,000
(ii) Profit after Tax	₹ 8,57,500
(iii) Tax Rate	30%
(iv) Profit before Interest and Tax	₹ 15,75,000

Answer 1

Interest Coverage Ratio = `"Profit before Interest and Tax"/"Fixed Interest Charges"`

Profit before tax = `₹ 8,57,500 xx 100/70`

= ₹ 12,25,000

Interest = Profit before Interest and Tax − Profit before Tax

= ₹ 15,75,000 − ₹ 12,25,000

= ₹ 3,50,000

Interest Coverage Ratio = `(₹ 15,75,000)/(₹ 3,50,000)`

= 4.5 times

Rate of Interest on Bank Loan = `(₹ 3,50,000)/(₹ 50,00,000) xx 100`

= 7%