Question

From the following details obtained from the financial statements of JN Ltd. calculate 'interest coverage ratio'. Net profit after tax Rs.2, 00,000; 12% Long-Term Debt Rs.40, 00,000; Rate of tax 40%.

Answer 1

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

Net Profit after tax : 2,00,000

Tax Rate : 40%

Now,

If Profit after tax is 60, profit before tax must be 100 and if profit after tax is 2,00,000, profit before tax would be 12% Long - term Debt 40,00,000

Interest on Long - term debt 12% of 40,00,000, i.e. 4,80,000

Accordingly, Profit before Interest and Tax would be 3,33,333 plus Interest

⇒ (3,33,333 + 4,80,000) = 8,13,333

∴ Interest Coverage Ratio = 8,13,333 / 4,80,000 = 1.69 Times