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CA Final · Advanced Financial Management · Risk Management

Ganga Foods Ltd has a ₹100 crore floating-rate loan linked to MCLR. Its sales contracts are fixed-price for two years, and operating cash flows are stable. Management estimates that a 1% rise in MCLR reduces annual profit before tax by ₹1 crore, and profit before interest and tax is ₹30 crore, with the interest cost currently ₹9 crore. If MCLR rises by 2 percentage points, the interest cover (PBIT/interest) becomes approximately:

Interest cover falls to about 2.73 times. A 2-point rise on a ₹100 crore floating loan adds ₹2 crore of interest, raising it from ₹9 crore to ₹11 crore, and dividing PBIT of ₹30 crore by ₹11 crore gives 2.73 times.

  1. A2.73 timesCorrect
  2. B3.33 times
  3. C1.50 times
  4. D2.31 times

Explanation

Interest rises by 2% of ₹100 crore = ₹2 crore, so interest becomes ₹11 crore. Cover = 30/11 = 2.73 times. Current cover is 3.33 times (the unchanged figure). 2.31 wrongly adds ₹4 crore of interest (30/13), while 1.50 is a base error.

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