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ARYA Ltd has a term Loan of ₹ 10,00,000. Interest on Loan for the year is ₹ 1,25,000 and its PBIT is ₹ 5,00,000. Its interest coverage ratio is
- a)2times
- b)3times
- c)2.5 times
- d)4 times
Correct answer is option 'D'. Can you explain this answer?
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Most Upvoted Answer
ARYA Ltd has a term Loan of 10,00,000. Interest on Loan for the year ...
Interest coverage ratio — PBIT/Interest on long-term debt = 5,00,000/1,25,000 = 4 times.
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ARYA Ltd has a term Loan of 10,00,000. Interest on Loan for the year ...
Calculation of Interest Coverage Ratio:
The interest coverage ratio is a financial metric that indicates a company's ability to pay its interest expenses on its outstanding debt. It is calculated by dividing the earnings before interest and taxes (EBIT) by the interest expense.
Given:
- Term Loan: ₹10,00,000
- Interest on Loan: ₹1,25,000
- PBIT (Profit Before Interest and Taxes): ₹5,00,000
Step 1: Calculate EBIT (Earnings Before Interest and Taxes)
EBIT = PBIT + Interest Expense
Since we are given PBIT, we need to calculate the interest expense.
Step 2: Calculate Interest Expense
Interest Expense = Interest on Loan
Interest Expense = ₹1,25,000
Step 3: Calculate EBIT
EBIT = PBIT + Interest Expense
EBIT = ₹5,00,000 + ₹1,25,000
EBIT = ₹6,25,000
Step 4: Calculate Interest Coverage Ratio
Interest Coverage Ratio = EBIT / Interest Expense
Interest Coverage Ratio = ₹6,25,000 / ₹1,25,000
Interest Coverage Ratio = 5
The interest coverage ratio of ARYA Ltd is 5 times.
Explanation:
The interest coverage ratio measures the company's ability to meet its interest obligations. In this case, the interest coverage ratio of 5 times indicates that ARYA Ltd is generating sufficient earnings to cover its interest expenses 5 times over. This means that the company's operating profit is 5 times higher than the interest expenses it needs to pay.
The higher the interest coverage ratio, the better the company's ability to handle its debt obligations. A ratio of 5 times is considered to be a healthy interest coverage ratio, indicating that ARYA Ltd is in a strong financial position and can comfortably meet its interest payments.
Option D, which states that the interest coverage ratio is 4 times, is incorrect. The correct answer is option D, which states that the interest coverage ratio is 5 times.
The interest coverage ratio is a financial metric that indicates a company's ability to pay its interest expenses on its outstanding debt. It is calculated by dividing the earnings before interest and taxes (EBIT) by the interest expense.
Given:
- Term Loan: ₹10,00,000
- Interest on Loan: ₹1,25,000
- PBIT (Profit Before Interest and Taxes): ₹5,00,000
Step 1: Calculate EBIT (Earnings Before Interest and Taxes)
EBIT = PBIT + Interest Expense
Since we are given PBIT, we need to calculate the interest expense.
Step 2: Calculate Interest Expense
Interest Expense = Interest on Loan
Interest Expense = ₹1,25,000
Step 3: Calculate EBIT
EBIT = PBIT + Interest Expense
EBIT = ₹5,00,000 + ₹1,25,000
EBIT = ₹6,25,000
Step 4: Calculate Interest Coverage Ratio
Interest Coverage Ratio = EBIT / Interest Expense
Interest Coverage Ratio = ₹6,25,000 / ₹1,25,000
Interest Coverage Ratio = 5
The interest coverage ratio of ARYA Ltd is 5 times.
Explanation:
The interest coverage ratio measures the company's ability to meet its interest obligations. In this case, the interest coverage ratio of 5 times indicates that ARYA Ltd is generating sufficient earnings to cover its interest expenses 5 times over. This means that the company's operating profit is 5 times higher than the interest expenses it needs to pay.
The higher the interest coverage ratio, the better the company's ability to handle its debt obligations. A ratio of 5 times is considered to be a healthy interest coverage ratio, indicating that ARYA Ltd is in a strong financial position and can comfortably meet its interest payments.
Option D, which states that the interest coverage ratio is 4 times, is incorrect. The correct answer is option D, which states that the interest coverage ratio is 5 times.
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ARYA Ltd has a term Loan of 10,00,000. Interest on Loan for the year is 1,25,000 and its PBIT is 5,00,000. Its interest coverage ratio isa)2timesb)3timesc)2.5 timesd)4 timesCorrect answer is option 'D'. Can you explain this answer?
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ARYA Ltd has a term Loan of 10,00,000. Interest on Loan for the year is 1,25,000 and its PBIT is 5,00,000. Its interest coverage ratio isa)2timesb)3timesc)2.5 timesd)4 timesCorrect answer is option 'D'. Can you explain this answer? for Class 12 2024 is part of Class 12 preparation. The Question and answers have been prepared according to the Class 12 exam syllabus. Information about ARYA Ltd has a term Loan of 10,00,000. Interest on Loan for the year is 1,25,000 and its PBIT is 5,00,000. Its interest coverage ratio isa)2timesb)3timesc)2.5 timesd)4 timesCorrect answer is option 'D'. Can you explain this answer? covers all topics & solutions for Class 12 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for ARYA Ltd has a term Loan of 10,00,000. Interest on Loan for the year is 1,25,000 and its PBIT is 5,00,000. Its interest coverage ratio isa)2timesb)3timesc)2.5 timesd)4 timesCorrect answer is option 'D'. Can you explain this answer?.
ARYA Ltd has a term Loan of 10,00,000. Interest on Loan for the year is 1,25,000 and its PBIT is 5,00,000. Its interest coverage ratio isa)2timesb)3timesc)2.5 timesd)4 timesCorrect answer is option 'D'. Can you explain this answer? for Class 12 2024 is part of Class 12 preparation. The Question and answers have been prepared according to the Class 12 exam syllabus. Information about ARYA Ltd has a term Loan of 10,00,000. Interest on Loan for the year is 1,25,000 and its PBIT is 5,00,000. Its interest coverage ratio isa)2timesb)3timesc)2.5 timesd)4 timesCorrect answer is option 'D'. Can you explain this answer? covers all topics & solutions for Class 12 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for ARYA Ltd has a term Loan of 10,00,000. Interest on Loan for the year is 1,25,000 and its PBIT is 5,00,000. Its interest coverage ratio isa)2timesb)3timesc)2.5 timesd)4 timesCorrect answer is option 'D'. Can you explain this answer?.
Solutions for ARYA Ltd has a term Loan of 10,00,000. Interest on Loan for the year is 1,25,000 and its PBIT is 5,00,000. Its interest coverage ratio isa)2timesb)3timesc)2.5 timesd)4 timesCorrect answer is option 'D'. Can you explain this answer? in English & in Hindi are available as part of our courses for Class 12.
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ARYA Ltd has a term Loan of 10,00,000. Interest on Loan for the year is 1,25,000 and its PBIT is 5,00,000. Its interest coverage ratio isa)2timesb)3timesc)2.5 timesd)4 timesCorrect answer is option 'D'. Can you explain this answer?, a detailed solution for ARYA Ltd has a term Loan of 10,00,000. Interest on Loan for the year is 1,25,000 and its PBIT is 5,00,000. Its interest coverage ratio isa)2timesb)3timesc)2.5 timesd)4 timesCorrect answer is option 'D'. Can you explain this answer? has been provided alongside types of ARYA Ltd has a term Loan of 10,00,000. Interest on Loan for the year is 1,25,000 and its PBIT is 5,00,000. Its interest coverage ratio isa)2timesb)3timesc)2.5 timesd)4 timesCorrect answer is option 'D'. Can you explain this answer? theory, EduRev gives you an
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