Question

From the following details, calculate the interest coverage ratio:
Net Profit after tax: 1,80,000
Long-term debt: 20,00,000
Interest rate: 15\(\%\)
Tax rate: 40\(\%\)

• A. 4 times
• B. 2 times
• C. 6 times
• D. 8 times

Answer 1

The Correct Option is B

1. Calculate the Interest Expense: - Interest expense on long-term debt = Long-term debt $\times$ Interest rate \[ \text{Interest expense} = 20,00,000 \times 15\% = 20,00,000 \times 0.15 = 3,00,000 \] 2. Calculate Net Profit before Interest and Tax (NPBIT): - Since Net Profit after tax is given, we need to calculate NPBIT. - Let $x$ be the Net Profit before tax. We know: \[ \text{Net Profit after tax} = x - \text{Tax} \] \[ \text{Tax} = \text{Tax rate} \times x \] \[ \text{Tax} = 40\% \times x = 0.4x \] - Therefore, \[ \text{Net Profit after tax} = x - 0.4x = 0.6x \] - Given that Net Profit after tax = 1,80,000: \[ 0.6x = 1,80,000 \implies x = \frac{1,80,000}{0.6} = 3,00,000 \] 3. Calculate NPBIT: - NPBIT = Net Profit before tax + Interest Expense \[ \text{NPBIT} = 3,00,000 + 3,00,000 = 6,00,000 \] 4. Calculate Interest Coverage Ratio (ICR): \[ \text{ICR} = \frac{\text{NPBIT}}{\text{Interest Expense}} = \frac{6,00,000}{3,00,000} = 2 \text{ times} \] Thus, the correct answer is actually 2 times .