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CA Final · Financial Reporting · Analysis of Financial Statements

Rohan Engineering Ltd has EBIT Rs 6,00,000, interest Rs 2,00,000, and a 12% preference dividend of Rs 1,50,000 (after tax, not deductible). The tax rate is 25%. Which is the correct combined fixed-charge coverage on a post-tax basis, computed as EBIT divided by (interest + preference dividend/(1 - tax rate))?

Using the stated formula the coverage is 1.50, because preference dividend grossed up is Rs 2,00,000 and total fixed charges are Rs 4,00,000 against EBIT of Rs 6,00,000. None of the listed options matches, so this item is flawed.

  1. A1.71Correct
  2. B2.00
  3. C2.25
  4. D3.00

Explanation

Pre-tax equivalent of preference dividend = 1,50,000/0.75 = Rs 2,00,000. Total fixed charges = 2,00,000 + 2,00,000 = Rs 4,00,000. Coverage = 6,00,000/4,00,000 = 1.50. Since 1.50 is not among the options, recheck: the option 1.71 would arise from 6,00,000/3,50,000, which is wrong; the data yield 1.50, so this question is invalid as written.

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