ROCE uses operating profit before interest divided by total capital employed Steps:

• Compute debenture interest: 10% × $260,000 =$26,000
• Adjust profit before interest: $40,475 +$26,000 = $66,475
• Calculate capital employed: $100,000 (share capital) +$136,679 (retained earnings) + $260,000 (debentures) =$496,679
• ROCE: ($66,475 /$496,679) × 100% = 13.03% Why C is correct:
• ROCE formula requires adding back interest expense to operating profit (EBIT) and dividing by closing equity plus long-term debt Why the others are wrong:
• A: Uses unadjusted profit with average capital employed instead of before-interest profit with closing capital
• B: Divides unadjusted profit by share capital plus debentures, ignoring retained earnings
• D: Divides unadjusted profit by equity only, yielding return on equity rather than capital employed

Final answer: C