Yes, with a Loan or Debt component in the total capital, shareholders are likely to have the benefit of a higher rate of return on share capital. This is because debt/loans carry a fixed charge and the amount of interest paid is deductible from earnings before tax payment. The benefit to shareholders will be realised only if the average rate of return on total capital investment is more than the rate of interest payable on the loan/debt.
It should be clear from this example that shareholders of Company ‘Y’ have higher rate of return than the Company ‘X’ due to the debt/loan component in the total capital of the Company.
