Three companies have the capital structures shown below. begin{tabular}{lrrr} Company & multicolumn{1}{c}{} & $B$ & $c$
Question:
Three companies have the capital structures shown below.
\begin{tabular}{lrrr}
Company & \multicolumn{1}{c}{} & $B$ & $c$ \\
& $£ 000$ & $£ 000$ & $£ 000$ \\
Ordinary shares & 600 & 400 & 50 \\
$12 \%$ loan notes & $\underline{-}$ & $\underline{200}$ & $\underline{550}$ \\
& $\underline{\underline{600}}$ & $\underline{\underline{600}}$ & $\underline{\underline{600}}$
\end{tabular}
The return on capital employed was 20\% for each firm in 2012, and in 2013 was 10\%. Corporation tax in both years was assumed to be $55 \%$, and loan note interest is an allowable expense against corporation tax.
(a) Calculate the percentage return on the shareholders' capital for each company for 2012 and 2013. Assume that all profits are distributed.
(b) Use your answer to explain the merits and the dangers of high gearing.
\section*{(Edexcel: University of London GCE A-level)}
Step by Step Answer:
Frank Woods Business Accounting Volume 2
ISBN: 9780273767923
12th Edition
Authors: Frank Wood, Ph.D. Sangster, Alan