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Interest cover is computed as

  • A.net profit divided by total debt
  • B.total debt divided by owners' equity
  • C.operating profit divided by interest charge
  • D.interest charge divided by operating profit

Answer: C

Correct answer: operating profit divided by interest charge

Interest cover asks how many times over the profit would pay the interest, so a cover of six means profit could fall by more than four fifths before the interest became unaffordable. It is the flow counterpart of the debt to equity ratio, which measures the stock of debt rather than the burden of servicing it.

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