In the formula for return on investment,interest expense is multiplied by (1 - tax rate).Why is this adjustment made?
A)Interest is not tax deductible
B)Debt is excluded from the denominator
C)Net income in the formula is after tax
D)Dividends are not deductible for tax purposes
E)None of the answers are correct.

Question

Quizplus · Accepted Answer

The adjustment is made because the interest expense is deducted from the net income to calculate the taxable income. Therefore, the net income used in the ROI formula is already after-tax. The adjustment is necessary to avoid double-counting the tax benefit of the interest expense.

In the Formula for Return on Investment,interest Expense Is Multiplied