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      Question

      The Debt Service Coverage Ratio (DSCR) is a key metric

      used by lenders to assess a company's ability to service its debt. It is calculated as:
      A Net Profit / Total Debt Correct Answer Incorrect Answer
      B (Net Profit + Depreciation + Interest) / (Interest + Principal Repayment) Correct Answer Incorrect Answer
      C EBIT / Interest Expense Correct Answer Incorrect Answer
      D Current Assets / Current Liabilities Correct Answer Incorrect Answer
      E Total Debt / Total Equity Correct Answer Incorrect Answer

      Solution

      DSCR measures the number of times a company's cash flow can cover its total debt service obligations. The numerator needs to represent the cash profit available. Since Net Profit is after depreciation (a non-cash expense) and interest, we add them back. So, Net Profit + Depreciation + non-cash charges + Interest gives a proxy for cash profit. The denominator is the total debt obligation for the period, which includes both Interest + Principal Repayment. Option C is the Interest Coverage Ratio, Option D is the Current Ratio, and Option E is the Debt-to-Equity Ratio.

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