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Company Apple Inc. ($000) Facebook Inc. ($000) Tesla Inc. ($000) Ordinary Shares 7,000 6,500 6,000 8% Debentures 3,000 2,500 2,000 Total Capital 10,000 9,000 8,000
Company | Apple Inc. ($000) | Facebook Inc. ($000) | Tesla Inc. ($000) |
Ordinary Shares | 7,000 | 6,500 | 6,000 |
8% Debentures | 3,000 | 2,500 | 2,000 |
Total Capital | 10,000 | 9,000 | 8,000 |
The return on capital employed was 14% for each firm in 1994, and in 1995 it was 9%. Corporation tax in both years was assumed to be 45%, and debenture interest is an allowable expense against corporation tax.
(a) Calculate the percentage return on the shareholders' capital for each company for 1994 and 1995. Assume that all profits are distributed. (b) Discuss the impact of gearing on the companies' profitability and risk.Step by Step Solution
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