NISM Certifications · NISM-Series-XV: Research Analyst · Company Analysis - Financial Analysis
A company has EBIT of Rs 90 crore, interest expense of Rs 15 crore and a preference dividend of Rs 6 crore. Its interest coverage ratio (EBIT/interest) is:
The interest coverage ratio is 6.0 times, found by dividing EBIT of Rs 90 crore by interest of Rs 15 crore. Preference dividends are not interest expense and are excluded from this ratio, so adding them to the denominator would understate coverage.
- A6.0 timesCorrect
- B5.0 times
- C7.5 times
- D4.3 times
Explanation
Interest coverage = EBIT / interest = 90/15 = 6.0 times. Preference dividend is not interest and is not included. Dividing by 15+6 = 21 gives 4.3, which wrongly adds the preference dividend. Using 90-15 = 75 over 15 gives 5.0, which wrongly deducts interest from EBIT.
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