ExxonMobil

• Ordinary Shares: $9,000,000
• 7% Debentures: $3,500,000

Chevron Corporation

• Ordinary Shares: $8,500,000
• 9% Debentures: $3,000,000

BP Plc

• Ordinary Shares: £8,200,000
• 8% Debentures: £2,700,000

The return on capital employed was 16% for each firm in 1991, and in 1992 it was 7%. Corporation tax in both years was assumed to be 42%, and debenture interest is an allowable expense against corporation tax.

(a) Calculate the percentage return on the shareholders' capital for each company for 1991 and 1992. Assume that all profits are distributed. (b) Discuss the financial implications of high gearing for these companies.