ACCA Applied Knowledge · Financial Accounting · Analysis of financial statements
Delta Co has profit before interest and tax of $360,000 and finance costs of $90,000 on its loan notes. What is its interest cover?
Interest cover is profit before interest and tax divided by finance costs, so 360,000 divided by 90,000 equals 4.0 times. Using profit after interest in the numerator would wrongly give 3.0 times, and inverting the ratio gives 0.25.
- A3.0 times
- B4.0 timesCorrect
- C5.0 times
- D0.25 times
Explanation
Interest cover = profit before interest and tax / finance costs = 360,000 / 90,000 = 4.0 times. The 3.0 times figure comes from deducting interest first (270,000 / 90,000). The 0.25 times figure inverts the ratio.
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