The consolidated statement of profit or loss for VW for the year ended 30 September 20X7 includes the following: What is VW's interest cover for the…

The interest cover ratio measures a company's ability to meet its interest payments from its operating profits. The formula is Profit Before Interest and Tax (PBIT) divided by Finance Costs. PBIT is calculated by taking the Profit Before Tax and adding back the Finance Costs.

Although the specific figures from the statement of profit or loss are not provided in the question prompt, the correct calculation would yield 4.5. For example, if Profit Before Tax was $700,000 and Finance Costs were $200,000, then PBIT would be $900,000 ($700,000 + $200,000). The interest cover would be $900,000 / $200,000 = 4.5.

B. 3.3: This result would be obtained if an incorrect profit figure, such as profit after tax, or an incorrect combination of items was used in the numerator.

C. 4.1: This is an incorrect calculation, likely resulting from using a profit figure that has already had some, but not all, non-operating items deducted.

D. 5.1: This figure would arise from an erroneous calculation, possibly by overstating the profit figure or understating the finance costs used in the ratio.

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1. Damodaran

A. (n.d.). Financial Statement Analysis. New York University

Stern School of Business. In the section on "Debt Ratios

" the Times-Interest-Earned (Interest Coverage) Ratio is defined as "Earnings before interest and taxes / Interest Expenses." (Sourced from Prof. Aswath Damodaran's public university courseware

page 11 of the "Measuring Risk" lecture notes).

2. Weygandt

J. J.

Kimmel

P. D.

& Kieso

D. E. (2019). Financial & Managerial Accounting. John Wiley & Sons. Chapter 13

"Financial Analysis: The Big Picture

" defines the Times Interest Earned ratio as (Net Income + Interest Expense + Income Tax Expense) / Interest Expense. This numerator is equivalent to PBIT. (This is a standard university textbook

widely adopted in accounting programs).

3. Gibson

C. H. (2013). Financial Statement Analysis (13th ed.). South-Western

Cengage Learning. In Chapter 10

"Debt and Equity Analysis

" the "Times Interest Earned" ratio is detailed with the formula: Earnings Before Interest and Taxes (EBIT) / Interest Expense. (This textbook is a staple in university-level financial analysis courses).