Three companies have the capital structures shown below. The return on capital employed was 20% for each

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Three companies have the capital structures shown below.

The return on capital employed was 20% for each firm in 2016, and in 2017 was 10%. Corporation tax in both years was assumed to be 55%, and loan note interest is an allowable expense against corporation tax.
(a) Calculate the percentage return on the shareholders’ capital for each company for 2016 and 2017. Assume that all profits are distributed.

(b) Use your answer to explain the merits and the dangers of high gearing.

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