Question : Read the following statements: Assertion (A) and Reason (R). Choose one of the correct alternatives given below:
Assertion (A): Interest Coverage Ratio expresses the relationship between profits available for payment of interest and the amount of interest payable.
Reason (R): A higher ratio ensures lesser safety of interest on debts.
Option 1: Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
Option 2: Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A).
Option 3: Assertion (A) is true but Reason (R) is False
Option 4: Assertion (A) is false but Reason (R) is true
Correct Answer: Assertion (A) is true but Reason (R) is False
Solution : A debt and profitability measure called the interest coverage ratio is used to assess how easily a business can pay the interest on its existing debt. Divided by interest expense during a specific time period, a company's earnings before interest and taxes (EBIT) yields the interest coverage ratio.
A three or higher interest coverage ratio is ideal. The minimum acceptable ratio is 1.5. For investors, a ratio of less than 1 is a warning sign.
Hence the correct answer is option 3.
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