Consider the following data: Net Profit after tax is Rs. 60,000; 12% Long-term debt is Rs. 20,000,000; and the Tax rate is 40%.Arrange the steps in the correct chronological sequence to calculate the Interest Coverage Ratio:(A) Calculate Net Profit before tax(B) Divide Net Profit before Interest and Tax by Interest on long-term debt(C) Calculate Net profit before interest and tax(D) Calculate Interest on Long-term DebtChoose the correct answer from the options given below:
- A(A), (D), (C), (B)
- B(A), (B), (C), (D)
- C(B), (A), (D), (C)
- D(C), (B), (D), (A)
Solution & Step-by-step Explanation
To find the Interest Coverage Ratio, we use the formula:
Let's order the logical calculation steps required:First, take Net Profit after tax and scale it back to compute Net Profit before Tax (A)Separately or sequentially compute the Interest on Long-term Debt () (D)Add the long-term interest back to the Net Profit before tax to find the Net Profit before Interest and Tax (EBIT) (C)Finally, divide EBIT by the Interest on long-term debt to get the final ratio value (B)Thus, the correct sequence is (A), (D), (C), (B).
Let's order the logical calculation steps required:First, take Net Profit after tax and scale it back to compute Net Profit before Tax (A)Separately or sequentially compute the Interest on Long-term Debt () (D)Add the long-term interest back to the Net Profit before tax to find the Net Profit before Interest and Tax (EBIT) (C)Finally, divide EBIT by the Interest on long-term debt to get the final ratio value (B)Thus, the correct sequence is (A), (D), (C), (B).