Rocky Co achieved earnings of $250,000 and profit before tax of $300,000 for year ended 31 December 20X0.
At 31 December 20X0 the company was financed as follows:
8% Bonds
$1,000,000
6% Preference shares
$500,000
Ordinary shares
$250,000
Reserves
$780,000
What was the interest cover ratio?
________ times (to 2 decimal points)
The correct answer is: 4.75 times.
Interest cover = PBIT / Interest payable
PBIT = Profit before tax plus interest payable
= $300,000 + (8% x $1,000,000)
= $380,000
Interest cover = $380,000/$80,000
= 4.75 times
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