1. McGill Inc. has profit before tax of Rs.63 million.

If the company's times interest

covered ratio is 8, what is the total interest charge?

Solution:

PBT = Rs.63 million

PBIT
Times interest covered = = 8
Interest
So PBIT = 8 x Interest
PBIT – Interest = PBT = Rs.63 million
8 x Interest – Interest = 7 x Interest = Rs.63 million
Hence Interest = Rs.9 million

2. The following data applies to a firm :

Interest charges Rs.200,000
Sales Rs.6,000,000
Tax rate 40 percent
Net profit margin 5 percent
What is the firm's times interest covered ratio?

Solution:

Sales = Rs.6,000,000
Net profit margin = 5 per cent
Net profit = Rs.6,000,000 x 0.05 = 300,000
Tax rate = 40 per cent
 300,000
So,Profit before tax = = Rs.500,000
(1-.4)

Interest charge= Rs.200,000

So Profit before interest and taxes = Rs.700,000

Hence700,000
Times interest covered ratio == 3.5 200,000

3. The following data applies to a firm:

Interest charges Rs.50,000

Sales Rs.300,000
Tax rate 25 percent
Net profit margin 3 percent

What is the firm's times interest covered ratio?

Solution:

Sales = Rs.300,000
Net profit margin = 3 per cent
Net profit = Rs.300,000 x 0.03 = 9,000
Tax rate = 25 per cent
9,000
So, Profit before tax = = Rs.12,000
(1-.25)
Interest charge = Rs.50,000
So Profit before interest and taxes = Rs.62,000
Hence 62,000
Times interest covered ratio = = 1.24
50,000

4. The following data applies to a firm :

Interest charges Rs.10,000,000

Sales Rs.80,000,000
Tax rate 50 percent
Net profit margin 10 percent

What is the firm's times interest covered ratio?

 Solution:

Sales = Rs.80,000,000
Net profit margin = 10 per cent
Net profit = Rs.80,000,000 x 0.1 = 8,000,000
Tax rate = 50 per cent
8,000,000
So, Profit before tax = = Rs.16,000,000
(1-.5)
Interest charge = Rs.10,000,000

So Profit before interest and taxes = Rs.26,000,000

Hence
26,000,000
Times interest covered ratio = = 2.6
10,000,000

5. A firm's current assets and current liabilities are 25,000 and 18,000 respectively. How
much additional funds can it borrow from banks for short term, without reducing the
current ratio below 1.35?

Solution:

CA = 25,000 CL = 18,000
Let BB stand for bank borrowing
CA+BB
= 1.35
CL+BB
25,000+BB
= 1.35
18,000+BB
1.35x 18,000 + 1.35 BB = 25,000 + BB
0.35BB = 25,000- 24,300 = 700
BB = 700/0.35 = 2,000