From the following information dtermine debt-service coverage ratio.
Debt: 10% debentures Rs 500000
12% Term loans Rs 100000
13.5% Term Loan Rs 150000
13% 2nd debentures Rs 200000
Fund from operations: Rs 25000
Amortizations: Preliminary exp Rs 12000
Goodwill w/o Rs 15000
Depreciation Rs 60000
Provision for tax Rs 80000
Non- operating income :
Interest/Dividend from investment Rs 16000
Profit on sale of fixed assets Rs 5000
Repayment due:
10% debentures Rs 200000
13.5% Term Loan Rs 50000
First we have to calculate the N/P from the fund frm operation as net profit is not given directly.
i.e.,
Fund From Operation 25000
(+) Non Operating Income:
Interest/Dividend from investment 16000
Profit on sale of fixed assets 5000
46000
(-) Non Operating Expense:
Preliminary exp 12000
Goodwill w/o 15000
Depreciation 60000
Provision for tax 80000
Net Loss (Instead of profit) (-121,000)
Earnings avail for debt service = (N/p + Tax+ Int. on debt funds +
Non cash operating expenses + Nonperating adujstment)
Here, it is net loss so obvsly no tax
Int on debt funds = (50,000+12,000+20,250+26,000)
= 108250
Non cash operating expense = 167000 (12000+15000+60000+80000)
Non operating adjustment = N.O Exp - N.O Income
167000-(16000+5000) = 146000
Earnings avail for debt service = (-121000)+108250+167000+146000
= 300250
Intrest + Instalments = 108250+(200000+50000)
= 358250
Debt Service Coverage Ratio = Earn avil. for debt srvice
Int + Instalments
= 3000250
358250 = .84 times
The idea ratio must be 2 to 3 times. But here, it is very low bcoz of net loss.The business is running in loss for current period. So available cash to pay off the current intrest and insalment is not sufficent.
Thanks a ton
CAclubindia
