UPSC CSE Prelims
Question 86
What is the importance of the term "Interest Coverage Ratio" of a firm in India?
- It helps in understanding the present risk of a firm that a bank is going to give a loan to.
- It helps in evaluating the emerging risk of a firm that a bank is going to give a loan to.
- 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:
View correct answer and explanation
Correct answer: A
Correct Option: A (1 & 2 only)
Explanation: Interest Coverage Ratio = EBIT divided by interest expense; it indicates ability to meet interest payments and helps lenders assess current and evolving credit risk. Higher coverage normally signals better, not worse, debt servicing.
Statement / Pair / Item-wise Analysis:
1. Correct - Low coverage exposes present vulnerability to borrowing costs.
2. Correct - Trends and projections of coverage reveal emerging credit risk.
3. Incorrect - Higher interest coverage indicates more earnings available per unit of interest expense.
Option-wise Analysis:
A. Correct-includes all and only valid statements/items 1, 2.
B. Incorrect-omits correct item 1 (Low coverage exposes present vulnerability to borrowing costs).
C. Incorrect-includes incorrect item 3 (Higher interest coverage indicates more earnings available per unit of interest expense); omits correct item 2 (Trends and projections of coverage reveal emerging credit risk).
D. Incorrect-includes incorrect item 3 (Higher interest coverage indicates more earnings available per unit of interest expense).