Question : Which of the following statements is false with respect to the Interest coverage ratio?
Option 1: Profit before interest and income tax is to be taken for the calculation of this ratio.
Option 2: This ratio indicates how many times the interest charges are covered by the profits available to pay interest charges.
Option 3: This ratio measures the margin of safety for long-term lenders.
Option 4: The higher the ratio, the less secure the lender is in respect of payment of interest regularly.
Correct Answer: The higher the ratio, the less secure the lender is in respect of payment of interest regularly.
Solution : Answer = The higher the ratio, the less secure the lender is in respect of payment of interest regularly.
The higher the ratio, the less secure the lender is in respect of payment of interest regularly; in fact, it is more secure the lender is in respect of payment of interest regularly. The interest coverage ratio measures a company's ability to meet its interest payments on its debts. A higher interest coverage ratio indicates that a company has more financial flexibility to meet its debt obligations, which is favourable for investors and creditors.
Hence, the correct option is 4.
