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For the year ended March 31,2017 ,net profit after tax of KX Ltd was Rs. 600000. the company has Rs 4000000 12�bentures of Rs 100 each. calculate interest coverage ratio assuming 40% tax rate. state it's significant also. will the interest coverage ratio change if during the year 2017 -2018, the company decided to redeem debentures of Rs 500000and expects to maintain the same rate of net profit and assume that the tax rate will not change.
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For the year ended March 31,2017 ,net profit after tax of KX Ltd was R...
Interest coverage ratio is 3.125 times. It signifies that the company can easily pay off all its interest obligations. If the company decides to redeem debentures, the interest coverage ratio will change as the interest payable is decreasing. Thus, in this case, the ratio will increase.
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For the year ended March 31,2017 ,net profit after tax of KX Ltd was R...
Interest Coverage Ratio
The interest coverage ratio is a financial metric used to assess a company's ability to pay interest expenses on its debt obligations. It measures the company's ability to generate enough operating income to cover its interest expenses. A higher interest coverage ratio indicates a stronger ability to fulfill debt obligations.
Calculation of Interest Coverage Ratio
The formula to calculate the interest coverage ratio is as follows:
Interest Coverage Ratio = (Net Profit + Interest Expense + Tax Expense) / Interest Expense
Given:
Net Profit after tax = Rs. 600,000
Number of debentures = 4,000,000
Face value of each debenture = Rs. 100
Step 1: Calculate the interest expense
Interest expense = Number of debentures * Face value of each debenture = 4,000,000 * 100 = Rs. 400,000,000
Step 2: Calculate the tax expense
Tax rate = 40%
Tax expense = Net Profit after tax * Tax rate = 600,000 * 0.4 = Rs. 240,000
Step 3: Calculate the interest coverage ratio
Interest Coverage Ratio = (Net Profit + Interest Expense + Tax Expense) / Interest Expense
= (600,000 + 400,000 + 240,000) / 400,000
= 1,240,000 / 400,000
= 3.1
Significance of the Interest Coverage Ratio
The interest coverage ratio of 3.1 indicates that KX Ltd generated 3.1 times the amount needed to cover its interest expenses. This suggests that the company has a relatively strong ability to meet its interest obligations.
Impact of Debenture Redemption
If KX Ltd decides to redeem debentures of Rs. 500,000, it will reduce the interest expense. As a result, the interest coverage ratio will improve, assuming the net profit and tax rate remain the same.
Explanation:
- When debentures are redeemed, the interest expense will decrease because the company will have a smaller amount of debt to pay interest on.
- The reduced interest expense will lead to a higher interest coverage ratio because the denominator in the ratio will be smaller.
- Since the net profit and tax rate are assumed to remain the same, the numerator of the interest coverage ratio will not change.
- Therefore, the interest coverage ratio will increase, indicating an improved ability to meet interest obligations.
In conclusion, the interest coverage ratio for KX Ltd is 3.1, indicating a relatively strong ability to pay interest on its debt. If the company decides to redeem debentures, the interest coverage ratio will improve due to a lower interest expense.
The interest coverage ratio is a financial metric used to assess a company's ability to pay interest expenses on its debt obligations. It measures the company's ability to generate enough operating income to cover its interest expenses. A higher interest coverage ratio indicates a stronger ability to fulfill debt obligations.
Calculation of Interest Coverage Ratio
The formula to calculate the interest coverage ratio is as follows:
Interest Coverage Ratio = (Net Profit + Interest Expense + Tax Expense) / Interest Expense
Given:
Net Profit after tax = Rs. 600,000
Number of debentures = 4,000,000
Face value of each debenture = Rs. 100
Step 1: Calculate the interest expense
Interest expense = Number of debentures * Face value of each debenture = 4,000,000 * 100 = Rs. 400,000,000
Step 2: Calculate the tax expense
Tax rate = 40%
Tax expense = Net Profit after tax * Tax rate = 600,000 * 0.4 = Rs. 240,000
Step 3: Calculate the interest coverage ratio
Interest Coverage Ratio = (Net Profit + Interest Expense + Tax Expense) / Interest Expense
= (600,000 + 400,000 + 240,000) / 400,000
= 1,240,000 / 400,000
= 3.1
Significance of the Interest Coverage Ratio
The interest coverage ratio of 3.1 indicates that KX Ltd generated 3.1 times the amount needed to cover its interest expenses. This suggests that the company has a relatively strong ability to meet its interest obligations.
Impact of Debenture Redemption
If KX Ltd decides to redeem debentures of Rs. 500,000, it will reduce the interest expense. As a result, the interest coverage ratio will improve, assuming the net profit and tax rate remain the same.
Explanation:
- When debentures are redeemed, the interest expense will decrease because the company will have a smaller amount of debt to pay interest on.
- The reduced interest expense will lead to a higher interest coverage ratio because the denominator in the ratio will be smaller.
- Since the net profit and tax rate are assumed to remain the same, the numerator of the interest coverage ratio will not change.
- Therefore, the interest coverage ratio will increase, indicating an improved ability to meet interest obligations.
In conclusion, the interest coverage ratio for KX Ltd is 3.1, indicating a relatively strong ability to pay interest on its debt. If the company decides to redeem debentures, the interest coverage ratio will improve due to a lower interest expense.
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For the year ended March 31,2017 ,net profit after tax of KX Ltd was Rs. 600000. the company has Rs 4000000 12�bentures of Rs 100 each. calculate interest coverage ratio assuming 40% tax rate. state it's significant also. will the interest coverage ratio change if during the year 2017 -2018, the company decided to redeem debentures of Rs 500000and expects to maintain the same rate of net profit and assume that the tax rate will not change.
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For the year ended March 31,2017 ,net profit after tax of KX Ltd was Rs. 600000. the company has Rs 4000000 12�bentures of Rs 100 each. calculate interest coverage ratio assuming 40% tax rate. state it's significant also. will the interest coverage ratio change if during the year 2017 -2018, the company decided to redeem debentures of Rs 500000and expects to maintain the same rate of net profit and assume that the tax rate will not change. for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about For the year ended March 31,2017 ,net profit after tax of KX Ltd was Rs. 600000. the company has Rs 4000000 12�bentures of Rs 100 each. calculate interest coverage ratio assuming 40% tax rate. state it's significant also. will the interest coverage ratio change if during the year 2017 -2018, the company decided to redeem debentures of Rs 500000and expects to maintain the same rate of net profit and assume that the tax rate will not change. covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for For the year ended March 31,2017 ,net profit after tax of KX Ltd was Rs. 600000. the company has Rs 4000000 12�bentures of Rs 100 each. calculate interest coverage ratio assuming 40% tax rate. state it's significant also. will the interest coverage ratio change if during the year 2017 -2018, the company decided to redeem debentures of Rs 500000and expects to maintain the same rate of net profit and assume that the tax rate will not change..
For the year ended March 31,2017 ,net profit after tax of KX Ltd was Rs. 600000. the company has Rs 4000000 12�bentures of Rs 100 each. calculate interest coverage ratio assuming 40% tax rate. state it's significant also. will the interest coverage ratio change if during the year 2017 -2018, the company decided to redeem debentures of Rs 500000and expects to maintain the same rate of net profit and assume that the tax rate will not change. for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about For the year ended March 31,2017 ,net profit after tax of KX Ltd was Rs. 600000. the company has Rs 4000000 12�bentures of Rs 100 each. calculate interest coverage ratio assuming 40% tax rate. state it's significant also. will the interest coverage ratio change if during the year 2017 -2018, the company decided to redeem debentures of Rs 500000and expects to maintain the same rate of net profit and assume that the tax rate will not change. covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for For the year ended March 31,2017 ,net profit after tax of KX Ltd was Rs. 600000. the company has Rs 4000000 12�bentures of Rs 100 each. calculate interest coverage ratio assuming 40% tax rate. state it's significant also. will the interest coverage ratio change if during the year 2017 -2018, the company decided to redeem debentures of Rs 500000and expects to maintain the same rate of net profit and assume that the tax rate will not change..
Solutions for For the year ended March 31,2017 ,net profit after tax of KX Ltd was Rs. 600000. the company has Rs 4000000 12�bentures of Rs 100 each. calculate interest coverage ratio assuming 40% tax rate. state it's significant also. will the interest coverage ratio change if during the year 2017 -2018, the company decided to redeem debentures of Rs 500000and expects to maintain the same rate of net profit and assume that the tax rate will not change. in English & in Hindi are available as part of our courses for Commerce.
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