What is the importance of the term "Interest Coverage Ratio" of a firm in India? 1. It helps in…
What is the importance of the term "Interest Coverage Ratio" of a firm in India?
1. It helps in understanding the present risk of a firm that a bank is going to give loan to.
2. It helps in evaluating the emerging risk of a firm that a bank is going to give loan to.
3. The higher a borrowing firm's level of Interest Coverage Ratio, the worse is its ability to service its debt.
Select the correct answer using the code given below:
1 and 2 only
2 only
1 and 3 only
1, 2 and 3
Solution
Interest Coverage Ratio = EBIT / Interest expense. It indicates ability to pay interest — assesses both present and emerging risk for lenders (1 and 2 correct). Higher ICR means better, not worse, ability to service debt (3 wrong). Answer: (a) 1 and 2 only.