Question

During the year ended 31.3.2021, Soma Ltd. earned net profit after tax ₹ 6,00,000. The company has a long term 10% debt of ₹ 50,00,000. The tax rate is 40%. The interest coverage ratio of the company will be:

Options

• 2 times

• 3 times

• 1.2 times

• 1.5 times

Answer 1

3 times

Explanation:

Interest on Loan = 10% of 50,00,000	= ₹ 5,00,000
Net Profit after interest and tax	= ₹ 6,00,000
Add: Interest	= ₹ 5,00,000
Add: Tax (40% of 10,00,000)	= ₹ 4,00,000
Net Profit before interest and tax	= 15,00,000

Let the profit before tax be x

60% of x = 6,00,000

x = `(6,00,000xx100)/60` = ₹ 10,00,000

Interest coverage Ratio = `"Net Profit before Interest & Tax"/"Interest on long term Loans"`

= `(15,00,000)/(5,00,000)`

= 3 times