ACCA Applied Knowledge · Financial Accounting · Ratios
Omega Co has profit from operations of $360,000, finance costs of $90,000, total equity of $1,200,000 and non-current liabilities (all interest-bearing debt) of $800,000. There are no current interest-bearing borrowings. Which combination of interest cover and gearing (debt/equity) is correct?
Interest cover is 4 times and debt-to-equity gearing is 66.7%. Cover is operating profit of 360,000 divided by finance costs of 90,000, and gearing is debt of 800,000 divided by equity of 1,200,000. The 40% figure uses debt over total capital instead.
- AInterest cover 4 times; gearing 66.7%Correct
- BInterest cover 4 times; gearing 40%
- CInterest cover 3 times; gearing 66.7%
- DInterest cover 5 times; gearing 150%
Explanation
Interest cover = 360,000/90,000 = 4 times. Gearing debt/equity = 800,000/1,200,000 = 66.7%. The 40% option uses debt/(debt+equity) = 800/2,000, a different formula, and so does not match debt/equity.
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