Volkswagen Group Ordinary Shares 2,200,000 10 Debentures 700,000 Toyota Motor Corporation Ordinary Shares 2,100,000 9 Debentures 500,000 General Motors Ordinary Shares $1,800,000 8 Debentures $600,000 The return on capital employed was 16 for each firm in 2011, and in 2012 it was 7 Corporation tax ...

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Volkswagen Group Ordinary Shares: 2,200,000 10% Debentures: 700,000 Toyota Motor Corporation Ordinary Shares: 2,100,000 9% Debentures: 500,000

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Question:

Volkswagen Group

Ordinary Shares: €2,200,000
10% Debentures: €700,000

Toyota Motor Corporation

Ordinary Shares: ¥2,100,000
9% Debentures: ¥500,000

General Motors

Ordinary Shares: $1,800,000
8% Debentures: $600,000

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.