IAI Actuarial Core Principles · Business Finance · Interpreting company accounting information
Sundaram Textiles has operating profit (EBIT) of ₹18 crore and interest payable of ₹6 crore. Its interest cover is calculated as EBIT divided by interest. If operating profit falls by 40% with interest unchanged, what is the new interest cover?
The new interest cover is 1.8 times. A 40% fall takes EBIT from ₹18 crore to ₹10.8 crore, and dividing by unchanged interest of ₹6 crore gives 1.8. The original cover of 3.0 times shows how sensitive cover is to profit declines.
- A1.2 times
- B1.8 timesCorrect
- C3.0 times
- D0.8 times
- 2.4 times
Explanation
New EBIT = 18 × 0.6 = ₹10.8 crore. Cover = 10.8/6 = 1.8 times. The original cover was 3.0 times, which is the distractor ignoring the fall. 1.2 would result from subtracting 40% of 18 twice wrongly applied as a drop of 60% of the cover base.
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