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ACCA Applied Skills · Financial Management · Financial objectives and relationship with corporate strategy

Which of the following is calculated as profit before interest and tax divided by finance costs (interest expense)?

Interest cover is profit before interest and tax divided by finance costs. It shows how many times a company's operating profit can pay its interest, so it measures financial risk for lenders. Gearing, return on equity and dividend cover use different numerators and denominators.

  1. AInterest coverCorrect
  2. BGearing ratio
  3. CReturn on equity
  4. DDividend cover

Explanation

Interest cover measures how many times profit before interest and tax covers the interest payable, indicating the safety of lenders' returns. Gearing compares debt with equity or capital employed. Return on equity uses profit attributable to shareholders over equity. Dividend cover is earnings divided by dividends.

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