A firm's after-tax operating income was $1,000,000 in 2010.It started the year with a total capitalization of $8,000,000 and ended 2010 with a total capitalization of $9,000,000.If the capital raised in 2010 did not contribute significantly to 2010's operating income,which of the following best represents the firm's return on capital in 2010?

Question

Quizplus · Accepted Answer

The return on capital is calculated as after-tax operating income divided by the average total capitalization. The average capitalization is ($8,000,000 + $9,000,000) / 2 = $8,500,000. Thus, the return on capital is $1,000,000 / $8,500,000 = 11.76%, which rounds to 12.5%.

A Firm's After-Tax Operating Income Was $1,000,000 in 2010