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:

1. The Interest Coverage Ratio (ICR) is a financial metric used to determine how easily a firm can pay interest on its outstanding debt. It is calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expenses for a given period. 2. Statement 1 is correct. A bank considering giving a loan uses the ICR to assess the firm's current financial health and its capacity to meet its existing interest obligations. A low ratio indicates higher risk. 3. Statement 2 is correct. Trends in the ICR over time, along with projections, help the bank evaluate the potential future risk (emerging risk) associated with the firm's ability to handle its debt burden if conditions change. 4. Statement 3 is incorrect. A higher Interest Coverage Ratio indicates that a firm is generating sufficient earnings to comfortably cover its interest expenses. Therefore, a higher ratio signifies a *better* ability to service its debt, not worse. 5. Thus, the importance of the ICR lies in its ability to help understand both present and emerging risks.