Three companies have the capital structures shown below.

Company	A	B	C
Ordinary shares	£750	£600	£100
12% debentures	£0	£400	£500
Total	£750	£1,000	£600

The return on capital employed was 30% for each firm in 2039, and in 2040 was 25%. Corporation tax in both years was assumed to be 10%, and debenture interest is an allowable expense against corporation tax.

Required:

(a) Calculate the percentage return on the shareholders’ capital for each company for 2039 and 2040. Assume that all profits are distributed. (b) Use your answer to explain the merits and dangers of high gearing.