The marginal tax rates used in chapter 4 are used here as well. While this analysis suggests that only Bookscape is earning excess returns, the following factors should be considered:

1. The book value of capital is affected fairly dramatically by accounting decisions. In particular, Disney's capital invested increased by almost $20 billion from 1995 to 1996 as a result of the acquisition of Capital Cities, and Disney's decision to use purchase accounting. If they had chosen pooling instead, they would have reported a return on capital that exceeded their cost of capital by a healthy amount.

2. We have used the operating income from the most recent year, notwithstanding the volatility in the income. To smooth out the volatility, we can compute the average operating income over the last 3 years and use it in computing the return on capital; this approach generates a "normalized" return on capital of 4.36% for Disney and 3.40% for Aracruz. Both are still below the cost of capital.

3. We did not adjust the operating income or the book value of capital to include operating leases that were outstanding at the end of the prior year. If we had made the adjustment for Disney and Bookscape, the returns on capital would have changed to 4.42% and 12.78% respectively.7

4. For Aracruz, we are assuming that since the book values are adjusted for inflation, the return on capital is a real return on capital and can be compared to the real cost of capital.8

7 To adjust the operating income, we add back the operating lease expense from the most recent year and subtract out the depreciation on the operating lease asset. To adjust the book value of capital, we add the present value of operating leases at the end of the previous year to debt.

8 Brazilian accounting standards allow for the adjustment of book value for inflation.

The analysis can also be done in purely equity terms. To do this, we would first compute the return on equity for each company by dividing the net income for the most recent year by the book value of equity at the beginning of the year and compare it to the cost of equity. Table 5.11 summarizes these results:

Table 5.11: Return on Equity and Cost of Equity Comparisons
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