Why Is Interest Added Back to Profit Before Tax When

question 63

Multiple Choice

Why is interest added back to profit before tax when calculating the rate of return on total assets?

• A) To reflect the fact that the efficient use of resources should be examined independently from the method of financing.
• B) Because it must be paid regardless of profits.
• C) Because interest rates are variable over time.
• D) To indicate to lenders that some risk is involved.

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Definitions:

Period

A length of time during which a series of events or an action takes place or is completed.

Total Percentage Return

The total return on an investment, expressed as a percentage, accounting for all forms of earnings including dividends, interest, and capital gains.

Quarterly Dividends

Dividends paid by a corporation to its shareholders every quarter of the fiscal year.

Shares

Units of ownership interest in a corporation or financial asset, providing a share in the company's profits and losses.