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 loan to. 2. It helps in evaluating the emerging risk of a firm that a bank is going to give 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 :
A
1 and 2 only
Correct Answer
B
2 only
C
1 and 3 only
D
1, 2 and 3
Explanation
The Interest Coverage Ratio (ICR) measures how easily a firm can pay interest on its outstanding debt using its earnings, making statements 1 and 2 correct as they help banks assess both current and future credit risks. Statement 3 is incorrect because a higher ICR signifies that the firm earns significantly more than its interest obligations, indicating a better—not worse—ability to service debt. The core concept tested is the use of financial solvency ratios to determine the creditworthiness of a corporate borrower.
Corporate Finance / BankingFinancial Ratios and Risk Assessment for LendingInterest Coverage Ratiofirm riskbank lendingdebt servicing abilitypresent riskemerging risk