CA Intermediate · Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis
Nair Ltd has EBIT of Rs 8,00,000, interest of Rs 2,00,000 and tax rate of 25%. Preference dividend is Rs 1,50,000. What is the interest coverage ratio?
The interest coverage ratio is 4 times, found by dividing EBIT of Rs 8,00,000 by interest of Rs 2,00,000. Tax and preference dividend do not enter this ratio, so the other figures given are irrelevant to the calculation.
- A3 times
- B4 timesCorrect
- C5.33 times
- D3.2 times
Explanation
Interest coverage = EBIT / interest = 8,00,000 / 2,00,000 = 4 times. Tax and preference dividend are not part of this ratio; 3 times wrongly deducts interest from EBIT before dividing.
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