Question

From the following information, calculate interest coverage ratio Profit after interest and tax 7,50,000 Rate of income tax 25% 9%debenture 8,00,000​

Answer 1

Answer:

Interest Coverage Ratio = 14.89 times

Step-by-step 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 =

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

★ 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 - $\sf{\dfrac{25x}{100}}$ = 7,50,000

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

⇒ $\sf{75x \: = 7,50,000}$

⇒ $\sf{x \: = \dfrac{7,50,000}{75}}$

⇒ x = 10,00,000

Net Profit before Tax = Rs 10,00,000

★ Interest on payment :

⇒ $\sf{8,00,000 \times \dfrac{9}{1100}}$

⇒ 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 =

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

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

∴ Interest Coverage Ratio = 14.89 times