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CS Professional · Strategic Management and Corporate Finance · Raising of Funds from Debt and Procedural Aspects

Kaveri Textiles Ltd has EBIT of Rs 24,00,000 and its capital structure includes Rs 40,00,000 of 10% debentures. No other debt exists. What is its interest coverage ratio, and what does it indicate?

Interest coverage is 6 times. Interest on Rs 40,00,000 at 10% is Rs 4,00,000, and EBIT of Rs 24,00,000 divided by this gives 6. It shows earnings cover the interest burden six times, indicating comfortable debt servicing capacity.

  1. A6 times; EBIT is six times the interest burden of Rs 4,00,000Correct
  2. B6 times; EBIT is six times the debenture principal
  3. C2.4 times; EBIT is 2.4 times the interest burden
  4. D10 times; EBIT covers the interest ten times

Explanation

Interest = 10% x Rs 40,00,000 = Rs 4,00,000. Coverage = 24,00,000 / 4,00,000 = 6 times. Check: 6 x 4,00,000 = 24,00,000. Dividing by principal gives 0.6, so option 2 is wrong in reasoning, and 2.4 or 10 come from using wrong figures.

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