(i) Computation of present Interest Coverage Ratio
Present EBIT = Rs. 15 crores
Term Loan @ 15% |
7.50 |
Bank loan @ 20% |
6.60 |
Public deposit @ 14% |
2.10 |
Present interest charges |
16.20 |
Present Interest Coverage Ratio = EBIT / Interest Charges
= 15 / 16.20
= 0.93
(ii) Computation of Revised Interest Coverage Ratio
Revised EBIT (120% of Rs. 15 crores) = Rs. 18 crores
Existing charges |
16.20 |
Add: Additional Charges (20% of additional borrowings) |
5.00 |
Proposed interest charges |
21.20 |
Revised Interest Coverage Ratio = Revised EBIT / Proposed Interest Charges
= 18 / 21.20
= 0.85
The interest coverage ratio is adversely affected as can be seen in the decrease of 8% due to increase in sales.