Volkswagen Group

• Ordinary Shares: €1,300,000
• 11% Debentures: €500,000

Toyota Motor Corporation

• Ordinary Shares: ¥1,100,000
• 10% Debentures: ¥300,000

General Motors

• Ordinary Shares: $900,000
• 9% Debentures: $400,000

The return on capital employed was 16% for each firm in 2011, and in 2012 it was 7%. Corporation tax in both years was assumed to be 42%, and debenture interest is an allowable expense against corporation tax.

(a) Calculate the percentage return on the shareholders' capital for each company for 2011 and 2012. Assume that all profits are distributed. (b) Discuss the financial implications of high gearing for these companies.