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CA Final · Financial Reporting · Analysis of Financial Statements

Mahesh Auto Ltd has the following: Profit before interest and tax Rs 9,00,000; interest expense Rs 3,00,000; tax rate 25%; equity shareholders' funds Rs 20,00,000 (no preference shares); total debt Rs 10,00,000. Using closing balances, what are the interest coverage ratio and return on equity?

Interest coverage is 3 times and return on equity is 22.5%. EBIT of 9,00,000 divided by interest of 3,00,000 gives 3. Profit after tax is 4,50,000 after deducting interest and 25% tax, and dividing by equity of 20,00,000 gives 22.5%.

  1. A3 times and 22.5%Correct
  2. B3 times and 30%
  3. C2 times and 22.5%
  4. D3 times and 45%

Explanation

Interest coverage = EBIT / interest = 9,00,000 / 3,00,000 = 3 times. PBT = 6,00,000; tax at 25% = 1,50,000; PAT = 4,50,000. ROE = 4,50,000 / 20,00,000 = 22.5%. The 30% option uses PBT (6,00,000/20,00,000), ignoring tax.

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