UPSC Prelims 2020 · GS Paper I
Question 62: Economy and Social Development
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 :
AnswerUPSC’s answer is (a).
The Interest Coverage Ratio (operating profit before interest and tax, divided by interest expense) shows how many times a firm's earnings cover its interest bill. A bank uses it to judge the firm's present risk and, by tracking its trend, its emerging risk. A higher ratio means a stronger ability to service debt, so statement 3 is reversed.
- 1. It shows the present risk of lending to a firm.
- 2. Its trend signals emerging risk.
- 3. A higher ratio shows a better, not worse, ability to service debt.
How you could have got this
- If you were sure statement 1 is correct, (b) goes: it leaves 1 out.
What you needed to know: It shows the present risk of lending to a firm.
- Then, if you were sure statement 3 is not correct, (c) and (d) go: each of them includes 3.
What you needed to know: A higher ratio shows a better, not worse, ability to service debt.
Only (a) is left. You didn’t need statement 2.
Which options go is worked out from UPSC’s key and the options, not by a model.
Why each option is right or wrong
- (a) Right: statements 1 and 2.
- (b) Wrong: statement 1 is also correct.
- (c) Wrong: statement 3 is false because a higher ratio means a better ability to pay.
- (d) Wrong: includes statement 3, which is false.
Answer: UPSC’s key. Explanation: written by UPSC Grade, not by UPSC.
Source: UPSC, Civil Services (Preliminary) Examination 2020, General Studies Paper I, Series A. The paper on upsc.gov.in.