The cost of capital is the rate of return required by investors in the companys securities. It thus follows that a capital structure should derive the lowest cost of capital which maximises the value of the company. Consider the following extract with financial information of Company A & Company B: Company B Company B R000 R000 Equity 1 000 600 Debt - 400 Total assets 1 000 1 000 EBIT 400 400 Interest - (44) Income before tax 400 356 Tax (112) (99.7) Net income 288 256.3 Required: 5.1. Calculate the ROE and ROA for the Companies A and B respectively. (5) 5.2. Compare and discuss the ROA and ROE of the two companies as calculated in (5.1) above. (3) 5.3. What happens if the ROA is lower than the interest charge (negative gearing)? (2)