Question

calculate icr from following
profit after intrest and tax rs. 750000
Rate of income tax 25%
9% debentures rs 800000

Answer 1

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Answer 2

Answer:

Interest Coverage Ratio = 14.89 times

Explanation:

Given :

Profit after Interest and tax = Rs 7,50,000

Rate of income tax = 25 %

9% Debentures = Rs 8,00,000

To find :

Calculate ICR (Interest Coverage Ratio)

Solution :

Interest Coverage Ratio =

$\dfrac{Profit \: before \: Interest \: and \: Tax}{Interest \: on \: Long \: Term \: Debt}$

★ Find :

Profit before Interest and Tax

Let,

Net Profit before Interest and Tax = x

Income Tax rate = 25 % of x

⇒ x - 25 % of x = 7,50,000

⇒ $x - \dfrac{25x}{100} = 7,50,000$

⇒ $\dfrac{100x \: - 25x}{100} = \: 7,50,000$

⇒ $75x \: = 7,50,000$

⇒ $x \: = \dfrac{7,50,000}{75}$

x = 10,00,000

Net Profit before Tax = Rs 10,00,000

★ Interest on payment :

⇒ $8,00,000 \times \frac{9}{100}$

⇒ 72,000

Interest on Debenture = Rs 72,000

Earning before Interest and Tax = Net Profit before Tax + Interest Expense

⇒ 10,00,000 + 72,000

⇒ 10,72,000

Earning before Interest and Tax = Rs 10,72,000

★ Interest Coverage Ratio (ICR) :

Interest Coverage Ratio =

$\dfrac{Profit \: before \: Interest \: and \: Tax}{Interest \: on \: Long \: Term \: Debt}$

⇒ $\dfrac{10,72,000}{72,000} = 14.89 \: times$

∴ Interest Coverage Ratio = 14.89 times