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Question
From the following calculate Interest coverage ratio:
Net profit after tax Rs 12,00,000; 10% debentures Rs 1,00,00,000; Tax Rate 40%
Options
1.2 times
3 times
2 times
5 times
MCQ
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Solution
3 times
Explanation:
Interest Expenses = 10% × 1,00,00,000
= `10/100 xx 1,00,00,000`
= ₹ 10,00,000
Profit Before Tax = `"Net Profit After Tax"/(1 - "Tax Rate")`
= `(12,00,000)/(1 - 0.40)`
= `(12,00,000)/(0.60)`
= ₹ 20,00,000
Net Profit before Interest and Tax = Profit Before Tax + Interest Expense
= 20,00,000 + 10,00,000
= ₹ 30,00,000
Interest Coverage Ratio = `"Net Profit before Interest and Tax"/"Interest Expenses"`
= `(30,00,000)/(10,00,000)`
= 3 times
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