Question

The following information has been obtained from the books of Gama Ltd.:

Particulars	Amount (₹)
Inventory	2,50,000
Total Current Assets	3,40,000
Shareholder’s Funds	10,00,000
12% Debentures	20,00,000
Net Profit Before Tax	9,60,000
Cost of Revenue from Operations	6,00,000

Hint:

Debt Equity Ratio shows the proportion between external and internal financing.
Interest Coverage Ratio helps assess the firm’s ability to pay interest from profits.

Answer 1

(i) Debt Equity Ratio
Formula: \[ \text{Debt Equity Ratio} = \frac{\text{Long-Term Debt}}{\text{Shareholder’s Funds}} \] Long-Term Debt = 12% Debentures = 20,00,000
Shareholder’s Funds = 10,00,000
\[ \text{Debt Equity Ratio} = \frac{20,00,000}{10,00,000} = 2 : 1 \] \(\Rightarrow\) Debt Equity Ratio is 2 : 1
(ii) Interest Coverage Ratio
Formula: \[ \text{Interest Coverage Ratio} = \frac{\text{Net Profit before Interest and Tax (NPBIT)}}{\text{Interest on Debt}} \] Given: Net Profit Before Tax = 9,60,000
Interest on 12% Debentures = \(12% \text{ of } 20,00,000 = 2,40,000\)
So, NPBIT = Net Profit Before Tax + Interest =
\(\Rightarrow\) \( 9,60,000 + 2,40,000 = 12,00,000 \)
\[ \text{Interest Coverage Ratio} = \frac{12,00,000}{2,40,000} = 5 \text{ times} \] \(\Rightarrow\) Interest Coverage Ratio is 5 times