Question

Profit after tax amounted to ₹ 6,00,000, and tax rate was 20%. If earnings before interest and tax was ₹ 10,00,000 and Nominal Value of Debentures amounted to ₹ 25,00,000 (assuming the only debt of the company), determine the rate of interest on debentures.

Answer 1

Tax = ${\displaystyle 6,00,000\times \frac{20}{80}}$ = ₹ 1,50,000

Net Profit Before Interest & Tax = Profit after Tax + Tax + Interest

10,00,000 = 6,00,000 + 1,50,000 + Interest

10,00,000 = 7,50,000 + Interest

Interest = ₹ 2,50,000

Interest on Debentures = ${\displaystyle \frac{\text{Nominal value of Debentures}\times \text{Rate of Interest}}{100}}$

${\displaystyle 2,50,000=\frac{25,00,000\times \text{Rate of Interest}}{100}}$

25,000,000 = 25,00,000 × Rate of Interest

${\displaystyle \frac{25,000,000}{25,00,000}}$ = Rate of Interest

∴ Rate of Interest (R) = 10%