Question

From the following information, calculate the Interest Coverage Ratio:

	₹
10,000 Equity Shares of ₹10 each	1,00,000
8% Preference Shares	70,000
10% Debentures	50,000
Long-term Loans from Bank	50,000
Interest on Long-term Loans from Bank	5,000
Profit after Tax	75,000
Tax	9,000

Hint: Profit before Interest and Tax is ₹ 94,000 (i.e.,₹ 75,000 + ₹9,000 +₹ 5,000 +₹ 5,000).

Answer 1

Interest on 10% Debentures = `50000 xx 10/100 = 5000`

Profit before Interest and Tax = Profit after Tax + Tax + Interest on Debentures + Interest on Long-term Loans from Bank

= 75,000 + 9,000 + 5,000 + 5,000 = 94,000

Total Interest Amount = Interest on Debentures + Interest on Long-term loans from Bank

= 5,000 + 5,000 = 10,000

Interest Coverage Ratio

=`"Net Profit before Interest and Tax"/"Interest" = 94000/10000 = 9.4` times