Caulfield Ltd.’s net profit after tax was $2,500. Its interest expense was $500 and the depreciation expense was $200, Assuming that corporate tax is $600, what is Caulfield Ltd’s interest coverage ratio?keep one digit after decimal.

Question

BlackTom AI · Accepted Answer

Let’s untangle the figures provided and recall how the interest coverage ratio is defined.

First, identify what EBIT represents: earnings before interest and taxes. It is the profit generated from operations before deducting interest and tax expenses.

We are given net profit after tax (NPAT) of 2,500, interest expense of 500, and tax expense of 600. The relationship among these is: NPAT = EBIT − Interest − Tax.

Plug in the known values to solve for EBIT: EBIT = NPAT + Interest + Tax = 2,500 + 500 + 600 = 3,600.

With EBIT determined, compute the interest coverage ratio, which is EBIT divided by interest expense. That is: Interest Coverage = 3,600 / 500 = 7.2.

A few quick checks or alternate paths: if one mistakenly tried to use net income or add back depreciation alone, the result would be inconsistent with the conventional EBIT concept. Depreciation affects tax and cash flows but is not itself used in the standard EBIT calculation for coverage ratios.

Therefore, the interest coverage ratio, to one decimal place, is 7.2.

ACX5903 - S1 2025 Quiz 3

Caulfield Ltd.’s net profit after tax was $2,500. Its interest expense was $500 and the depreciation expense was $200, Assuming that corporate tax is $600, what is Caulfield Ltd’s interest coverage ratio?keep one digit after decimal.

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