CA Intermediate · Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis
A company's interest coverage ratio is 5 times and its EBIT is ₹7,50,000. What is the annual interest expense?
Interest coverage equals EBIT divided by interest, so interest equals ₹7,50,000 divided by 5, which is ₹1,50,000. Multiplying EBIT by the ratio would wrongly invert the relationship between the two figures.
- A₹37,50,000
- B₹1,50,000Correct
- C₹7,50,000
- D₹1,87,500
Explanation
Interest coverage = EBIT/Interest, so Interest = 7,50,000/5 = 1,50,000. Check: 1,50,000 x 5 = 7,50,000. Multiplying EBIT by 5 gives 37,50,000, which inverts the formula.
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