From the following details, calculate the interest coverage ratio:
1. Calculate Interest Expense: Interest expense on long-term debt is computed as Long-term debt multiplied by the interest rate. \[ \text{Interest expense} = 20,00,000 \times 15\% = 20,00,000 \times 0.15 = 3,00,000 \] 2. Determine Net Profit before Interest and Tax (NPBIT): Given Net Profit after tax, we must first calculate Net Profit before tax. Let this be $x$. The relationship is: \[ \text{Net Profit after tax} = x - \text{Tax} \] Where Tax is calculated as: \[ \text{Tax} = \text{Tax rate} \times x \] \[ \text{Tax} = 40\% \times x = 0.4x \] Substituting this back into the Net Profit after tax equation: \[ \text{Net Profit after tax} = x - 0.4x = 0.6x \] With Net Profit after tax at 1,80,000: \[ 0.6x = 1,80,000 \implies x = \frac{1,80,000}{0.6} = 3,00,000 \] Thus, Net Profit before tax is 3,00,000. 3. Calculate NPBIT: NPBIT is the sum of Net Profit before tax and Interest Expense. \[ \text{NPBIT} = 3,00,000 + 3,00,000 = 6,00,000 \] 4. Compute Interest Coverage Ratio (ICR): The ICR is calculated by dividing NPBIT by Interest Expense. \[ \text{ICR} = \frac{\text{NPBIT}}{\text{Interest Expense}} = \frac{6,00,000}{3,00,000} = 2 \text{ times} \] The Interest Coverage Ratio is 2 times.