• Samsung Electronics
  • Ordinary Shares: ₩6,000,000
  • 7% Debentures: ₩2,000,000
• LG Electronics
  • Ordinary Shares: ₩5,500,000
  • 8% Debentures: ₩1,800,000
• Panasonic Corporation
  • Ordinary Shares: ¥5,200,000
  • 9% Debentures: ¥1,500,000

The return on capital employed was 17% for each firm in 1998, and in 1999 it was 10%. Corporation tax in both years was assumed to be 43%, and debenture interest is an allowable expense against corporation tax.

(a) Calculate the percentage return on the shareholders' capital for each company for 1998 and 1999. Assume that all profits are distributed. (b) Evaluate the effects of high gearing on the financial performance and risk profile of these companies.