Question

From the following information, calculate Interest Coverage Ratio:

Financial Information

Particulars	Amount (₹)
Profit after Tax	6,30,000
Tax Rate	30%
15% Debentures	20,00,000
Equity Share Capital	10,00,000

Hint:

Always add back interest to Profit before Tax to get EBIT when computing Interest Coverage Ratio.

Answer 1

Interest: 15% of 20,00,000 equals 3,00,000.
Profit before Tax: Calculated as Profit after Tax divided by (1 - Tax Rate), which is 6,30,000 / 0.7, resulting in 9,00,000.
EBIT: Derived by adding Profit before Tax and Interest, specifically 9,00,000 + 3,00,000, yielding 12,00,000.
Interest Coverage Ratio: Determined by dividing EBIT by Interest, equalling 12,00,000 / 3,00,000, which is 4 times.