Section A

A company has an operating profit (Profit Before Interest and Tax) of $120,000. Its finance costs for the year are $30,000, and its tax expense is $20,000.

What is the company's interest cover ratio?

Answer options:

3 times

4 times

2.3 times

6 times

How to approach this question

Use the formula: Interest Cover = Profit Before Interest and Tax (PBIT) / Finance Costs.

Full Answer

B.4 times✓ Correct

Interest cover ratio = Profit Before Interest and Tax (PBIT) / Finance costs. Ratio = $120,000 / $30,000 = 4 times. This means the company generates enough operating profit to pay its interest bill 4 times over.

Common mistakes

Using Profit After Tax or Profit Before Tax instead of PBIT.

Question 33 All questions Question 35

Practice the full ACCA FA — Financial Accounting Practice Exam 1

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