Question : From the following information calculate interest coverage ratio:
Net Profit after tax Rs. 1,20,000; 15% Long-term debt 12,00,000; and Tax rate 40%.
Option 1: 3 times
Option 2: 2 times
Option 3: 1.67 times
Option 4: 1.50 times
Correct Answer: 1.67 times
Solution :
Net Profit after Tax = Rs. 80,000
Tax Rate = 40%
Net Profit before tax = Net profit after tax × 100/ (100 − Tax rate)
= Rs. 1,20,000 × 100/(100 − 40)
= Rs. 2,00,000
Interest on Long-term Debt = 15% of Rs. 12,00,000 = Rs. 1,80,000
Net profit before interest and tax = Net profit before tax + Interest
= Rs. 1,20,000 + Rs. 1,80,000 = Rs. 3,00,000
Interest Coverage Ratio = Net Profit before Interest and Tax/Interest on long-term debt
= Rs. 3,00,000/Rs. 1,80,000
= 1.67 times
Hence option c is the correct answer.
