What is the importance of the term Interest Coverage Ratio of a firm in India? 1. It helps in understanding the present risk of a firm that a bank is going to give a loan to. 2. It helps in evaluating the emerging risk of a firm that a bank is going to gi

examrobotsa's picture

Submitted by examrobotsa on

Q: (IAS/2020)
What is the importance of the term “Interest Coverage Ratio” of a firm in India?
1. It helps in understanding the present risk of a firm that a bank is going to give a loan to.
2. It helps in evaluating the emerging risk of a firm that a bank is going to give a loan to.
3. The higher a borrowing firm’s level of Interest Coverage Ratio, the worse is its ability to service its debt.

Select the correct answer using the code given below:

question_subject: 

Economics

question_exam: 

IAS

stats: 

0,196,110,196,35,31,44

keywords: 

{'interest coverage ratio': [0, 0, 0, 1], 'borrowing firm': [0, 0, 0, 1], 'loan': [1, 0, 1, 6], 'debt': [0, 0, 0, 1], 'firm': [0, 0, 0, 3], 'bank': [0, 1, 0, 1], 'risk': [1, 1, 2, 4], 'india': [8, 1, 7, 13], 'present risk': [0, 0, 0, 1]}

The correct answer is a.

The Interest Coverage Ratio (ICR) of a firm is a measure of its ability to pay its interest expenses on outstanding debt. It is calculated by dividing a company’s earnings before interest and taxes (EBIT) by its interest expenses. A higher ICR indicates that a company is generating sufficient earnings to meet its interest obligations, while a lower ICR suggests that the company may have difficulty servicing its debt.

Therefore, options 1 and 2 are correct as ICR helps in understanding both present and emerging risks of a firm for a bank to give a loan to. However, option 3 is incorrect as a higher ICR actually indicates a firm`s better ability to service its debt.