Question

Calculate the Interest Coverage Ratio of the company.

• A. 12 times
• B. 10 times
• C. 30 times
• D. 8 times

Hint:

Interest Coverage Ratio indicates how comfortably a company can pay interest on its debt.

Answer 1

The Correct Option is B

Step 1: Interest Expense Calculation

Interest Expense = 13% of ₹3,00,000 = ₹39,000.

Step 2: Earnings Before Interest and Tax (EBIT) Calculation

EBIT is calculated by adding back interest expense to Net Profit Before Tax (NPBT), assuming NPBT includes interest: EBIT = NPBT + Interest Expense = ₹3,51,000 + ₹39,000 = ₹3,90,000.

Step 3: Interest Coverage Ratio Calculation

Interest Coverage Ratio = EBIT / Interest Expense = ₹3,90,000 / ₹39,000 = 10.

Step 4: Interpretation

A ratio of 10 indicates that the company's earnings before interest and tax are 10 times its interest expense, demonstrating a robust capacity to meet its interest obligations.