Question

In: Accounting

"cover" as in dividend cover and interest cover means:

"cover" as in dividend cover and interest cover means:

Solutions

Expert Solution

Dividend Cover -

Dividend Cover means the profit available for distribution of dividend. It is the ratio that calculate by Company's Earnings per share divided by Dividend paid to its shareholders.

For E.g. If the company earned profit of $50,000 and declared dividend of $100,00 then the cover you can calculate by following way -

Dividend Cover = Net income / Dividend declared

= $50,000 / $10,000

= 5 Times

Hence you can say dividend cover of the company is 5 times.

.

Interest Cover -

Interest Cover on the other hand takes into consideration income which is before Interest and tax as known as "Operating Profit". It means the amount earned by the company to pay its interest.

For E.g. If the company has earned $70,000 as operating Profit and has interest expense for that financial year $10,000 then the interest cover can be calculated by the following way -

Interest Cover = EBIT / Interest

= $70,000 / $10,000

= 7 Times

This means company has earned 7 times of its interest cover in the operating profit.

ekkarill92 answered 2 years ago
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