Question

Which is the correct formula for Interest Coverage Ratio?

Question 13 options:

	Net income / Interest expense
	Interest income / Interest expense
	Earnings before interest and taxes / Interest expense
	Earnings before taxes / Interest expense

Answer 1

Interest Coverage ratio = Earnings before interest and tax / Interest Expense

Earnings before Interest and Tax =Sales – Cost of goods sold –Administrative expense – Depreciation

Or Earnings before Interest and Tax = Net Income + Taxes + Interest Expense

Example: Suppose Earnings before interest and tax is 50000 and Interest expense is 10000, Then Interest coverage ratio will be 5. [Calculation shown below]

Interest Coverage ratio = Earnings before interest and tax / Interest Expense

= 50000 / 10000 = 5