Question
From the following details, calculate interest coverage
ratio: Net Profit after tax Rs. 60,000; 15% Long-term debt 10,00,000; and Tax rate 40%.Solution
Net Profit after Tax = Rs. 60,000 Tax Rate = 40% Net Profit before tax = Net profit after tax × 100/(100 – Tax rate) = Rs. 60,000 × 100/(100 – 40) = Rs. 1,00,000 Interest on Long-term Debt = 15% of Rs. 10,00,000 = Rs. 1,50,000 Net profit before interest and tax = Net profit before tax + Interest = Rs. 1,00,000 + Rs. 1,50,000 = Rs. 2,50,000 Interest Coverage Ratio = Net Profit before Interest and Tax/Interest on long-term debt = Rs. 2,50,000/Rs. 1,50,000 = 1.67 times.
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