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NISM Certifications · NISM-Series-XV: Research Analyst · Company Analysis - Financial Analysis

A firm has EBIT of Rs 80 crore and interest expense of Rs 16 crore. Its tax rate is 25%. What are its interest coverage ratio and its net profit (PAT)?

Interest coverage is 5 times (EBIT Rs 80 crore divided by interest Rs 16 crore) and PAT is Rs 48 crore. Profit before tax is Rs 64 crore, tax at 25% is Rs 16 crore, leaving Rs 48 crore after tax.

  1. ACoverage 5 times; PAT Rs 48 croreCorrect
  2. BCoverage 5 times; PAT Rs 60 crore
  3. CCoverage 4 times; PAT Rs 48 crore
  4. DCoverage 4 times; PAT Rs 64 crore

Explanation

Interest coverage = EBIT / interest = 80/16 = 5 times. PBT = 80 - 16 = 64; tax at 25% = 16; PAT = 48. The Rs 60 crore option taxes EBIT-less-nothing incorrectly (80 x 0.75), ignoring interest.

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