Net profit after taxes of a firm is Rs.1,00,000 and its fixed interest charges on long term debt are…
Given Net Profit After Tax (PAT) = Rs. 1,00,000 and an income tax rate of 60%, Profit Before Tax (PBT) is PAT / (1 - 0.60) = 1,00,000 / 0.40 = Rs. 2,50,000. Adding back…
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Net profit after taxes of a firm is Rs.1,00,000 and its fixed interest charges on long term debt are Rs. 20,000. What is the interest coverage ratio if the rate of income tax is 60%?
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Correct answer B
Given Net Profit After Tax (PAT) = Rs. 1,00,000 and an income tax rate of 60%, Profit Before Tax (PBT) is PAT / (1 - 0.60) = 1,00,000 / 0.40 = Rs. 2,50,000. Adding back fixed interest charges of Rs. 20,000 gives Earnings Before Interest and Taxes (EBIT) = Rs. 2,50,000 + Rs. 20,000 = Rs. 2,70,000. Therefore, the Interest Coverage Ratio is EBIT / Interest = 2,70,000 / 20,000 = 13.5 times.
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UGC NET Commerce