•Netflix Inc.
oOrdinary Shares: $750,000
o8% Debentures: $250,000
•Intel Corporation
oOrdinary Shares: $600,000
o10% Debentures: $400,000
•IBM Corporation
oOrdinary Shares: $500,000
o12% Debentures: $300,000
The return on capital employed was 17% for each firm in 2018, and in 2019 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 2018 and 2019. Assume that all profits are distributed. (b) Analyze the risks and benefits associated with different levels of gearing for these companies.