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From the Following Details Obtained from the Financial Statements of Jeev Ltd. Calculate Interest Coverage Ratio - Accountancy

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From the following details obtained from the financial statements of Jeev Ltd. Calculate interest coverage ratio

Net Profit after tax 1, 20,000

12% Long term Debt 20, 00,000

Tax Rate 40%

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Solution

`"Interest Coverage Ratio =""Profit before Interest and Tax"/"Interest on Long - term Debt"`

Net Profit after Tax = 1, 20,000

Tax Rate: 40 %

Now,

If Profit after tax is 60, Profit before Tax must be 100 And if profit after tax is 1,20,000; profit before tax would be

`100/60xx120000=200000`

12% Long –term Debt 20, 00,000

Interest on Long-term debt 12% of 20, 00,000 i.e. 2, 40,000

Accordingly, Profit before Interest and Tax would be 2, 00,000 plus Interest

`rArr(200000+240000)=440000therefore"Interest Coverage Ratio="440000/240000=1.83"times"`

 

Concept: Solvency Ratios - Interest Coverage Ratio
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