Question
Microsoft Corp. has issued $6,000,000 in ordinary shares and $2,500,000 in 8% debentures. Google LLC has $5,500,000 in ordinary shares and $2,000,000 in 9% debentures.
Microsoft Corp. has issued $6,000,000 in ordinary shares and $2,500,000 in 8% debentures. Google LLC has $5,500,000 in ordinary shares and $2,000,000 in 9% debentures. Amazon Inc. has $5,200,000 in ordinary shares and $1,800,000 in 7% debentures.
In 2000, the return on capital employed for each firm was 18%, and in 2001 it was 10%. Corporation tax in both years was assumed to be 48%, and debenture interest is an allowable expense against corporation tax.
(a) Calculate the percentage return on the shareholders' capital for each company for 2000 and 2001. Assume that all profits are distributed. (b) Analyze the advantages and disadvantages of high gearing for these companies.
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