The following data are available for a firm for a given year:
Net Sales 21,896 -
Sales & marketing expenses 4,346
Administrative expenses 2,143 -
COGS 10,084 -
Depreciation 967 -
Interest expense 573 -
Tax rate 35%
Dividends paid 3,445 -
Preferred Dividends 897 -
Average total equity 37,432 -
Average common equity 26,782 -
Average total liabilities 18,583
In the above example, the firm's return on total capital equals ________.
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A. B. C. D.C
Return on total capital = (Net income + interest expense)/average total capital. The average total capital includes debt, common equity and preferred stock. Note that since Total assets = Total liabilities + Total Equity, the denominator is also equal to total assets. In the above example, Net Income = Earnings after depreciation, interest expense and taxes = (21,896 - 4,346 - 2,143 - 10,084 - 967 - 573)*(1 - 0.35) = 2,459. Therefore, Return on total capital = (2,459 + 573)/
(37,432 + 18,583) = 5.41%.