Test 1: Financial Analysis and Planning - Ratio Analysis: answer key

Question 1 · 2 marks · Financial Analysis and Planning - Ratio Analysis · medium

Scenario. Kaveri Components Ltd. manufactures precision components for industrial customers. Its finance team is reviewing liquidity at 31 March 2027 before renewing its working-capital facility. Statement extracts are in ₹ lakh; figures are closing balances unless stated otherwise. | Current assets | Amount | Current liabilities | Amount | |---|---:|---|---:| | Inventory | 160 | Trade payables | 110 | | Trade receivables | 140 | Outstanding operating expenses | 20 | | Cash and bank | 40 | Statutory and tax dues | 10 | | Current investments | 20 | Current maturity of term loan | 30 | | Prepaid expenses | 10 | Bank overdraft | 20 | | Other current assets | 30 | Cash-credit borrowing | 40 | | **Total** | **400** | **Total** | **230** | Short-term bank borrowings total ₹60 lakh (overdraft and cash credit). Equity shareholders' funds are ₹500 lakh; non-current assets are ₹600 lakh. Debt comprises debentures ₹180 lakh at 8%, term loan ₹120 lakh at 10% (₹30 lakh current maturity), and bank borrowings at 12%. FY 2026-27 EBIT is ₹120 lakh; finance cost is ₹33.60 lakh; tax rate is 30%; cash generated from operations before interest and tax is ₹150 lakh. Equity beta is 1.10 (context only). Working-capital cycle data: annual revenue ₹1,080 lakh (credit sales ₹900 lakh), cost of goods sold ₹720 lakh and credit purchases ₹540 lakh; average inventory ₹150 lakh, receivables ₹125 lakh and payables ₹90 lakh. Use 360 days. For current and quick ratios, use total current liabilities; for the cash ratio, include current investments with cash and bank; for NWC, exclude short-term bank borrowings from current liabilities as prescribed by ICAI.

Using Kaveri Components Ltd.'s closing figures, calculate its current ratio as at 31 March 2027.

1. 1.74 : 1 (correct answer)
2. 2.35 : 1
3. 1.50 : 1
4. 1.60 : 1

Answer: A — 1.74 : 1

Explanation. Current ratio = Current Assets ÷ Current Liabilities = ₹400 lakh ÷ ₹230 lakh = 1.7391, rounded to 1.74:1. The denominator must include all reported current liabilities, including the ₹60 lakh overdraft and cash-credit balances. Option b incorrectly removes those bank borrowings; options c and d use an incorrect asset or liability base. The operating-cycle averages do not replace closing balance-sheet figures for this calculation.

Where it goes wrong. Removing short-term bank borrowings from current liabilities when calculating the current ratio.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 2 · 2 marks · Financial Analysis and Planning - Ratio Analysis · medium

What is Kaveri Components Ltd.'s quick ratio, applying the formula prescribed in the study material?

1. 0.91 : 1
2. 1.00 : 1 (correct answer)
3. 1.74 : 1
4. 0.26 : 1

Answer: B — 1.00 : 1

Explanation. Quick Assets = Current Assets − Inventory − Prepaid Expenses = ₹400 − ₹160 − ₹10 = ₹230 lakh. Quick Ratio = ₹230 ÷ ₹230 = 1.00:1. Current investments remain in quick assets under the chapter's formula because only inventory and prepaid expenses are deducted. Option a wrongly removes current investments; option c is the current ratio, while option d is the cash ratio.

Where it goes wrong. Deducting current investments from quick assets even though the prescribed formula deducts only inventory and prepaid expenses.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 3 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Calculate Kaveri Components Ltd.'s cash ratio (absolute liquidity ratio) using cash, bank balances and current investments.

1. 0.35 : 1
2. 0.17 : 1
3. 0.26 : 1 (correct answer)
4. 0.43 : 1

Answer: C — 0.26 : 1

Explanation. Cash Ratio = (Cash and Bank Balances + Current Investments) ÷ Current Liabilities = (₹40 + ₹20) ÷ ₹230 = 0.2609, or 0.26:1. Trade receivables are excluded because they are not absolute cash resources. Option a brings receivables into the numerator, option b omits current investments, and option d uses a reduced current-liability denominator.

Where it goes wrong. Using all quick assets rather than only cash, bank balances and marketable/current investments.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 4 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Under the net working capital convention stated in the ICAI study material, determine (i) Kaveri Components Ltd.'s net working capital and (ii) the amount by which it exceeds Current Assets less all Current Liabilities.

1. ₹170 lakh and ₹0 lakh
2. ₹230 lakh and ₹0 lakh
3. ₹170 lakh and ₹60 lakh
4. ₹230 lakh and ₹60 lakh (correct answer)

Answer: D — ₹230 lakh and ₹60 lakh

Explanation. Short-term bank borrowings = overdraft ₹20 lakh + cash credit ₹40 lakh = ₹60 lakh. Current liabilities excluding these borrowings = ₹230 − ₹60 = ₹170 lakh. Therefore, ICAI-basis NWC = ₹400 − ₹170 = ₹230 lakh. Unadjusted Current Assets less all Current Liabilities is ₹400 − ₹230 = ₹170 lakh, so the difference is ₹60 lakh. Option c reports only the unadjusted figure as NWC.

Where it goes wrong. Forgetting the study material's specific exclusion of short-term bank borrowings from current liabilities for this NWC measure.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 5 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. Navchetna Grid Systems Ltd. operates regional power-storage facilities and is negotiating a five-year term loan. Its examined balance sheet extracts at 31 March 2027 are below; amounts are in ₹ lakh. | Capital and liabilities | Amount | |---|---:| | Equity share capital | 240 | | Reserves and surplus | 120 | | 8% preference share capital | 60 | | 10% debentures | 300 | | 12% bank term loan | 180 | | Trade payables | 80 | | Outstanding expenses | 20 | | Tax payable | 20 | | **Total assets / total sources** | **1,020** | Current liabilities comprise the three operating/tax balances in the table. Total outside liabilities include them; long-term debt comprises only debentures and the bank term loan. Equity shareholders' funds are equity share capital plus reserves. Include preference capital in the proprietary fund; for gearing, use preference shares, debentures and the term loan over equity share capital plus reserves. Equity beta is 1.25 (context only). FY 2026-27 EBIT is ₹180 lakh; interest is payable at the stated debt rates; depreciation and amortisation are ₹36 lakh; corporate tax is 25%. There are no preference dividend arrears or exceptional gains. The annual principal instalment due next year is ₹48 lakh; cash generated from operations before interest and tax is ₹216 lakh. Derive net profit after tax from these facts. Operating-cycle data: annual credit sales ₹720 lakh, cost of goods sold ₹480 lakh, credit purchases ₹420 lakh, average inventory ₹80 lakh, receivables ₹100 lakh and payables ₹70 lakh. Use 360 days; assume no other non-cash adjustments or asset-disposal losses.

For Navchetna Grid Systems Ltd., calculate the paired Debt-Equity Ratios using (i) total outside liabilities and (ii) only long-term interest-bearing debt, respectively. Use equity shareholders' funds as the denominator in both cases.

1. 1.67 : 1 and 1.33 : 1 (correct answer)
2. 1.33 : 1 and 1.67 : 1
3. 1.50 : 1 and 1.33 : 1
4. 1.67 : 1 and 1.50 : 1

Answer: A — 1.67 : 1 and 1.33 : 1

Explanation. Equity shareholders' funds = ₹240 + ₹120 = ₹360 lakh. Total outside liabilities = debentures ₹300 + bank loan ₹180 + current liabilities ₹120 = ₹600 lakh; ratio = 600 ÷ 360 = 1.67:1. Long-term interest-bearing debt = ₹480 lakh; ratio = 480 ÷ 360 = 1.33:1. Option b reverses the bases, while option c omits part of outside liabilities.

Where it goes wrong. Treating total outside liabilities and long-term interest-bearing debt as interchangeable definitions of debt.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 6 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Using total outside liabilities for the debt numerator, determine Navchetna Grid Systems Ltd.'s Debt to Total Assets Ratio and Proprietary Ratio, respectively.

1. 47.06% and 52.94%
2. 58.82% and 41.18% (correct answer)
3. 52.94% and 47.06%
4. 41.18% and 58.82%

Answer: B — 58.82% and 41.18%

Explanation. Total outside liabilities = ₹300 + ₹180 + ₹120 = ₹600 lakh. Debt to Total Assets = 600 ÷ 1,020 × 100 = 58.82%. Proprietary Fund = equity share capital ₹240 + reserves ₹120 + preference share capital ₹60 = ₹420 lakh. Proprietary Ratio = 420 ÷ 1,020 × 100 = 41.18%. Option a uses only long-term debt in the first numerator and misclassifies preference capital in the second.

Where it goes wrong. Omitting current outside liabilities from the debt ratio or excluding preference share capital from the proprietary fund.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 7 · 2 marks · Financial Analysis and Planning - Ratio Analysis · medium

Calculate Navchetna Grid Systems Ltd.'s Capital Gearing Ratio in accordance with the formula in the study material.

1. 1.00 : 1
2. 1.33 : 1
3. 1.50 : 1 (correct answer)
4. 1.67 : 1

Answer: C — 1.50 : 1

Explanation. Capital Gearing Ratio = (Preference Share Capital + Debentures + Other Borrowed Funds) ÷ (Equity Share Capital + Reserves and Surplus). Substitution gives (₹60 + ₹300 + ₹180) ÷ (₹240 + ₹120) = ₹540 ÷ ₹360 = 1.50:1. Trade payables and accrued expenses are not fixed-interest capital. Option b excludes preference capital; option d incorrectly adds current liabilities.

Where it goes wrong. Including trade creditors in fixed-interest capital or omitting preference share capital from the gearing numerator.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 8 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Calculate Navchetna Grid Systems Ltd.'s (i) Interest Coverage Ratio and (ii) Debt Service Coverage Ratio using earnings available for debt service as PAT + depreciation/amortisation + interest.

1. 3.49 times and 2.17 times
2. 3.49 times and 1.29 times
3. 4.00 times and 1.85 times
4. 3.49 times and 1.85 times (correct answer)

Answer: D — 3.49 times and 1.85 times

Explanation. Interest = 10% of ₹300 + 12% of ₹180 = ₹30 + ₹21.60 = ₹51.60 lakh. ICR = EBIT ÷ Interest = 180 ÷ 51.60 = 3.49 times. PAT = (180 − 51.60) × 75% = ₹96.30 lakh. DSCR numerator = 96.30 + 36 + 51.60 = ₹183.90 lakh; denominator = 51.60 + 48 = ₹99.60 lakh; DSCR = 1.85 times. Option a substitutes pre-tax operating cash flow for the specified PAT-based numerator.

Where it goes wrong. Using cash flow before interest and tax in DSCR when the question expressly requires PAT plus non-cash expenses and interest.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 9 · 2 marks · Financial Analysis and Planning - Ratio Analysis · medium

Scenario. A retailer reports Current Assets of ₹600 lakh, Current Liabilities of ₹300 lakh, inventory of ₹180 lakh and prepaid expenses of ₹20 lakh. It purchases additional inventory of ₹60 lakh on credit. What are the revised Current Ratio and Quick Ratio, respectively?

A retailer reports Current Assets of ₹600 lakh, Current Liabilities of ₹300 lakh, inventory of ₹180 lakh and prepaid expenses of ₹20 lakh. It purchases additional inventory of ₹60 lakh on credit. What are the revised Current Ratio and Quick Ratio, respectively?

1. 1.83 : 1 and 1.11 : 1 (correct answer)
2. 2.00 : 1 and 1.33 : 1
3. 1.83 : 1 and 1.28 : 1
4. 2.20 : 1 and 1.11 : 1

Answer: A — 1.83 : 1 and 1.11 : 1

Explanation. After the credit purchase, Current Assets = 600 + 60 = ₹660 lakh and Current Liabilities = 300 + 60 = ₹360 lakh. Current Ratio = 660 ÷ 360 = 1.83:1. Revised inventory is ₹240 lakh, so Quick Assets = 660 − 240 − 20 = ₹400 lakh; Quick Ratio = 400 ÷ 360 = 1.11:1. Option b ignores the transaction; option c fails to update the quick-asset base.

Where it goes wrong. Recording the inventory purchase but failing to increase current liabilities by the same credit amount.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 10 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A company has a Current Ratio of 2.40:1 and a Quick Ratio of 1.60:1. Current Liabilities are ₹25 lakh and prepaid expenses are ₹3 lakh. Assuming Quick Assets = Current Assets − Inventory − Prepaid Expenses, find the inventory balance.

A company has a Current Ratio of 2.40:1 and a Quick Ratio of 1.60:1. Current Liabilities are ₹25 lakh and prepaid expenses are ₹3 lakh. Assuming Quick Assets = Current Assets − Inventory − Prepaid Expenses, find the inventory balance.

1. ₹14 lakh
2. ₹17 lakh (correct answer)
3. ₹20 lakh
4. ₹23 lakh

Answer: B — ₹17 lakh

Explanation. Current Assets = 2.40 × ₹25 lakh = ₹60 lakh. Quick Assets = 1.60 × ₹25 lakh = ₹40 lakh. From Quick Assets = Current Assets − Inventory − Prepaid Expenses, inventory = 60 − 40 − 3 = ₹17 lakh. Option a deducts prepaid expenses twice; option c treats the difference between current and quick assets as inventory without separating prepayments.

Where it goes wrong. Failing to deduct prepaid expenses separately when deriving inventory from current and quick ratios.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 11 · 2 marks · Financial Analysis and Planning - Ratio Analysis · medium

Scenario. A company has a Current Ratio of 2.50:1 and net working capital of ₹60 lakh. It has no short-term bank borrowings. Determine its Current Assets and Current Liabilities.

A company has a Current Ratio of 2.50:1 and net working capital of ₹60 lakh. It has no short-term bank borrowings. Determine its Current Assets and Current Liabilities.

1. ₹90 lakh and ₹30 lakh
2. ₹120 lakh and ₹60 lakh
3. ₹100 lakh and ₹40 lakh (correct answer)
4. ₹150 lakh and ₹90 lakh

Answer: C — ₹100 lakh and ₹40 lakh

Explanation. Let Current Liabilities be x. Since the Current Ratio is 2.50, Current Assets = 2.50x. With no short-term bank borrowings, NWC = Current Assets − Current Liabilities = 60. Thus 2.50x − x = 60; 1.50x = 60; x = ₹40 lakh. Current Assets = 2.50 × 40 = ₹100 lakh. Option b gives a ratio of 2:1, not 2.5:1.

Where it goes wrong. Using the current ratio as a difference rather than as a multiplicative relationship between current assets and liabilities.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 12 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A company has Current Assets of ₹300 lakh, including inventory of ₹120 lakh and prepaid expenses of ₹30 lakh. Cash, bank balances and current investments total ₹45 lakh; Current Liabilities are ₹150 lakh. Inventory costing ₹40 lakh is sold for cash at its carrying amount. What are the revised Quick Ratio and Cash Ratio, respectively?

A company has Current Assets of ₹300 lakh, including inventory of ₹120 lakh and prepaid expenses of ₹30 lakh. Cash, bank balances and current investments total ₹45 lakh; Current Liabilities are ₹150 lakh. Inventory costing ₹40 lakh is sold for cash at its carrying amount. What are the revised Quick Ratio and Cash Ratio, respectively?

1. 1.00 : 1 and 0.30 : 1
2. 1.27 : 1 and 0.30 : 1
3. 1.53 : 1 and 0.57 : 1
4. 1.27 : 1 and 0.57 : 1 (correct answer)

Answer: D — 1.27 : 1 and 0.57 : 1

Explanation. The sale converts ₹40 lakh of inventory into cash, so total Current Assets remain ₹300 lakh, inventory falls to ₹80 lakh and cash-type balances rise to ₹85 lakh. Quick Assets = 300 − 80 − 30 = ₹190 lakh; Quick Ratio = 190 ÷ 150 = 1.27:1. Cash Ratio = 85 ÷ 150 = 0.57:1. Option b ignores the cash received; option c incorrectly adds the sale proceeds to total current assets.

Where it goes wrong. Adding cash proceeds to total current assets even though inventory is converted into another current asset at book value.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 13 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A company reports total assets of ₹1,200 lakh and total outside liabilities of ₹600 lakh, including ₹140 lakh of non-interest-bearing current liabilities. It also has preference share capital of ₹80 lakh. Its long-term interest-bearing debt comprises ₹300 lakh of debentures and a ₹160 lakh term loan. Equity share capital is ₹400 lakh and reserves are ₹120 lakh. Calculate (i) Debt to Total Assets Ratio using total outside liabilities and (ii) long-term Debt-Equity Ratio.

A company reports total assets of ₹1,200 lakh and total outside liabilities of ₹600 lakh, including ₹140 lakh of non-interest-bearing current liabilities. It also has preference share capital of ₹80 lakh. Its long-term interest-bearing debt comprises ₹300 lakh of debentures and a ₹160 lakh term loan. Equity share capital is ₹400 lakh and reserves are ₹120 lakh. Calculate (i) Debt to Total Assets Ratio using total outside liabilities and (ii) long-term Debt-Equity Ratio.

1. 50.00% and 0.88 : 1 (correct answer)
2. 38.33% and 0.88 : 1
3. 50.00% and 1.15 : 1
4. 38.33% and 1.15 : 1

Answer: A — 50.00% and 0.88 : 1

Explanation. Debt to Total Assets Ratio = Total Outside Liabilities ÷ Total Assets × 100 = 600 ÷ 1,200 × 100 = 50.00%. Equity shareholders' funds = 400 + 120 = ₹520 lakh. Long-term debt = 300 + 160 = ₹460 lakh; long-term Debt-Equity Ratio = 460 ÷ 520 = 0.88:1. Option b uses only long-term debt in the asset ratio; option c wrongly includes current liabilities in the long-term debt numerator.

Where it goes wrong. Using the same debt definition for both the total-outside-liabilities asset ratio and the long-term debt-equity variant.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 14 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. At the start of a restructuring, a company has preference share capital of ₹90 lakh, debentures of ₹240 lakh, other long-term borrowings of ₹120 lakh, equity share capital of ₹300 lakh, reserves of ₹150 lakh and a debit balance in the Statement of Profit and Loss of ₹30 lakh. It issues ₹120 lakh of equity shares at par and uses the entire proceeds to redeem ₹120 lakh of debentures. What is the revised Capital Gearing Ratio?

At the start of a restructuring, a company has preference share capital of ₹90 lakh, debentures of ₹240 lakh, other long-term borrowings of ₹120 lakh, equity share capital of ₹300 lakh, reserves of ₹150 lakh and a debit balance in the Statement of Profit and Loss of ₹30 lakh. It issues ₹120 lakh of equity shares at par and uses the entire proceeds to redeem ₹120 lakh of debentures. What is the revised Capital Gearing Ratio?

1. 0.83 : 1
2. 0.61 : 1 (correct answer)
3. 1.07 : 1
4. 0.73 : 1

Answer: B — 0.61 : 1

Explanation. Before restructuring, fixed-charge capital is 90 + 240 + 120 = ₹450 lakh. After redeeming ₹120 lakh of debentures, it is ₹330 lakh. The denominator after the equity issue is equity share capital ₹420 + reserves ₹150 − losses ₹30 = ₹540 lakh. Revised gearing = 330 ÷ 540 = 0.6111, or 0.61:1. Option c is the pre-restructuring ratio; option a does not reduce both numerator and denominator correctly.

Where it goes wrong. Adjusting only the debt numerator or forgetting that the equity issue increases the denominator while the debenture redemption reduces the numerator.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 15 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A company has total assets of ₹1,500 lakh and a Proprietary Ratio of 40%. Its preference share capital is ₹100 lakh and equity share capital is ₹300 lakh. Assuming the proprietary fund consists only of equity share capital, preference share capital and reserves, determine (i) reserves and surplus and (ii) the Debt-Equity Ratio using total outside liabilities.

A company has total assets of ₹1,500 lakh and a Proprietary Ratio of 40%. Its preference share capital is ₹100 lakh and equity share capital is ₹300 lakh. Assuming the proprietary fund consists only of equity share capital, preference share capital and reserves, determine (i) reserves and surplus and (ii) the Debt-Equity Ratio using total outside liabilities.

1. ₹200 lakh and 1.50 : 1
2. ₹100 lakh and 1.80 : 1
3. ₹200 lakh and 1.80 : 1 (correct answer)
4. ₹300 lakh and 2.00 : 1

Answer: C — ₹200 lakh and 1.80 : 1

Explanation. Proprietary Fund = 40% × ₹1,500 lakh = ₹600 lakh. Since it includes preference capital, reserves = 600 − 100 − 300 = ₹200 lakh. Total outside liabilities = total assets − proprietary fund = 1,500 − 600 = ₹900 lakh. Equity shareholders' funds = equity share capital + reserves = 300 + 200 = ₹500 lakh. Debt-Equity Ratio = 900 ÷ 500 = 1.80:1. Option b omits the preference capital when deriving reserves.

Where it goes wrong. Including preference share capital in proprietary funds but also incorrectly including it in equity shareholders' funds for the debt-equity denominator.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 16 · 2 marks · Financial Analysis and Planning - Ratio Analysis · medium

Scenario. A company reports Profit Before Tax of ₹84 lakh and interest expense of ₹28 lakh. Its tax rate is 30%. Calculate the Interest Coverage Ratio.

A company reports Profit Before Tax of ₹84 lakh and interest expense of ₹28 lakh. Its tax rate is 30%. Calculate the Interest Coverage Ratio.

1. 3.00 times
2. 3.50 times
3. 4.50 times
4. 4.00 times (correct answer)

Answer: D — 4.00 times

Explanation. EBIT = Profit Before Tax + Interest = ₹84 lakh + ₹28 lakh = ₹112 lakh. Interest Coverage Ratio = EBIT ÷ Interest = 112 ÷ 28 = 4.00 times. The tax rate is not used because the numerator is earnings before interest and taxes. Option a incorrectly uses PBT directly; option c adds tax to the wrong base.

Where it goes wrong. Using profit after tax or profit before tax directly instead of reconstructing EBIT for interest coverage.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 17 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A company currently earns EBIT of ₹240 lakh and pays annual interest of ₹40 lakh. It plans to borrow an additional ₹200 lakh at 12% interest. After commissioning the funded project, EBIT is expected to rise to ₹270 lakh. What will be the revised Interest Coverage Ratio? Ignore tax effects.

A company currently earns EBIT of ₹240 lakh and pays annual interest of ₹40 lakh. It plans to borrow an additional ₹200 lakh at 12% interest. After commissioning the funded project, EBIT is expected to rise to ₹270 lakh. What will be the revised Interest Coverage Ratio? Ignore tax effects.

1. 4.22 times (correct answer)
2. 4.50 times
3. 3.90 times
4. 5.63 times

Answer: A — 4.22 times

Explanation. Additional annual interest = ₹200 lakh × 12% = ₹24 lakh. Revised total interest = ₹40 + ₹24 = ₹64 lakh. Revised EBIT is ₹270 lakh. Interest Coverage Ratio = 270 ÷ 64 = 4.21875, rounded to 4.22 times. Option b divides the revised EBIT by old interest only; option d uses an incomplete interest adjustment. Tax is irrelevant to this EBIT-based coverage measure.

Where it goes wrong. Recognising the EBIT increase but overlooking the additional fixed interest burden created by the new borrowing.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 18 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A company reports EBIT of ₹150 lakh, depreciation of ₹30 lakh, annual interest of ₹30 lakh and scheduled loan principal repayment of ₹50 lakh. Calculate the Fixed Charges Coverage Ratio using the chapter's cash-flow coverage formula.

A company reports EBIT of ₹150 lakh, depreciation of ₹30 lakh, annual interest of ₹30 lakh and scheduled loan principal repayment of ₹50 lakh. Calculate the Fixed Charges Coverage Ratio using the chapter's cash-flow coverage formula.

1. 1.88 times
2. 2.25 times (correct answer)
3. 3.00 times
4. 4.50 times

Answer: B — 2.25 times

Explanation. The chapter's Fixed Charges Coverage Ratio = (EBIT + Depreciation) ÷ (Interest + Repayment of Loan). Therefore, numerator = 150 + 30 = ₹180 lakh and denominator = 30 + 50 = ₹80 lakh. Coverage = 180 ÷ 80 = 2.25 times. Option a omits depreciation or mismatches the denominator; option c ignores the principal repayment. Both fixed interest and scheduled repayment must be covered.

Where it goes wrong. Using EBIT alone or omitting loan principal repayment from fixed financing charges.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 19 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A company reports PAT of ₹84 lakh, depreciation and amortisation of ₹24 lakh, interest of ₹21 lakh, loss on sale of a fixed asset of ₹3 lakh and a scheduled loan instalment of ₹27 lakh. Calculate DSCR using the earnings-available-for-debt-service definition in the study material.

A company reports PAT of ₹84 lakh, depreciation and amortisation of ₹24 lakh, interest of ₹21 lakh, loss on sale of a fixed asset of ₹3 lakh and a scheduled loan instalment of ₹27 lakh. Calculate DSCR using the earnings-available-for-debt-service definition in the study material.

1. 1.75 times
2. 2.50 times
3. 2.75 times (correct answer)
4. 3.50 times

Answer: C — 2.75 times

Explanation. Earnings Available for Debt Service = PAT + non-cash operating expenses + interest + other adjustments such as loss on sale of fixed assets. Thus, numerator = 84 + 24 + 21 + 3 = ₹132 lakh. Debt service = interest 21 + instalment 27 = ₹48 lakh. DSCR = 132 ÷ 48 = 2.75 times. Option b omits the loss adjustment; option d excludes interest from the numerator or understates debt service.

Where it goes wrong. Leaving out the specified non-cash/other adjustment or excluding interest from the earnings-available numerator.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 20 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A lender assesses a borrower using cash generated from operations before interest and tax as earnings available for debt service. The relevant operating cash flow is ₹240 lakh, annual interest is ₹50 lakh and principal instalments due are ₹70 lakh. Using this cash-flow basis, calculate DSCR.

A lender assesses a borrower using cash generated from operations before interest and tax as earnings available for debt service. The relevant operating cash flow is ₹240 lakh, annual interest is ₹50 lakh and principal instalments due are ₹70 lakh. Using this cash-flow basis, calculate DSCR.

1. 1.60 times
2. 2.40 times
3. 3.00 times
4. 2.00 times (correct answer)

Answer: D — 2.00 times

Explanation. The question specifies cash generated from operations before interest and tax as the numerator, an alternative basis permitted by the chapter note. Total debt service = interest ₹50 lakh + principal instalments ₹70 lakh = ₹120 lakh. DSCR = ₹240 lakh ÷ ₹120 lakh = 2.00 times. Option b divides by interest alone; option c omits the interest component or uses only principal in the denominator.

Where it goes wrong. Using only interest or only principal as debt service instead of aggregating both fixed payments.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis