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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%. - CBSE (Arts) Class 12 - Accountancy

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ConceptSolvency Ratios - Interest Coverage Ratio

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%.

Solution

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

Is there an error in this question or solution?
Solution 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%. Concept: Solvency Ratios - Interest Coverage Ratio.
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