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Accounting Rate of Return in Empirical Research: A Correction," (Spring 1986). A. W. Stark, "Estimating the Internal Rate of Return from

Introduction KAY,l in a recent paper in this journal, questioned the predominant view concerning the adequacy of the accounting rate of return as a proxy for the true economic rate of return. Indeed he suggested that-

These conclusions were drawn from a model of the finn that did not explicitly include working capital requirements, loan financing and taxes. However, to illustrate his results, Kay used as input data the financial performance of a sample of British manufacturing industry and then estimated the sample pre-tax d.c.f. yield for the ten-year period 1960-69. His example therefore includes periodic working capital requirements, loan financing and taxes. One purpose of this reply is to show that the extension of Kay's model, to the more complicated world of his example, was only one of a whole multitude of such possible extensions; in Section 1 below an appropriate extension is derived and in Section 2 the results are applied to Kay's data to produce a revised estimate of the true nite of return. The main conclusion drawn is that it is not, in general, the accountant's rate of profit that helps us to estimate the true rate of return.