Three companies have the capital structures shown below.
Apple Inc.
•Ordinary Shares: $1,000,000
•10% Debentures: $400,000
Google LLC
•Ordinary Shares: $800,000
•12% Debentures: $300,000
Amazon Inc.
•Ordinary Shares: $600,000
•15% Debentures: $200,000
The return on capital employed was 18% for each firm in 2020, and in 2021 it was 12%. Corporation tax in both years was assumed to be 50%, and debenture interest is an allowable expense against corporation tax.
(a) Calculate the percentage return on the shareholders' capital for each company for 2020 and 2021. Assume that all profits are distributed. (b) Use your answer to explain the merits and dangers of high gearing.