ACCA Applied Knowledge · Financial Accounting · Ratios
Foxtrot Co has profit before interest and tax of $240,000 and finance costs of $60,000 on its borrowings. What is its interest cover?
Interest cover is 4 times, calculated as profit before interest and tax of $240,000 divided by finance costs of $60,000. The numerator must be profit before interest, not profit after interest.
- A4 timesCorrect
- B3 times
- C5 times
- D0.25 times
Explanation
Interest cover = profit before interest and tax / finance costs = $240,000 / $60,000 = 4 times. Using profit after interest ($180,000) gives 3 times, which is the wrong numerator. Inverting the ratio gives 0.25.
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