question archive A company raises € 500m in shareholders" equity for an R&D project
A company raises € 500m in shareholders" equity for an R&D project
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A company raises € 500m in shareholders" equity for an R&D project. Has it become richer or poorer? By how much? What is your answer if the company spends half of the funds in the first 2 years, and the project does not produce results? In the 3rd year, the company uses the remaining funds to acquire a competitor that is overvalued by 25%. But, thanks to synergies with this new subsidiary, it is able to improve its earnings by €75m. Has it become richer or poorer? By how much?
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Answer:
1: The company has become richer by raising more equity since it now has funds available for use.Amount = 500m
2: Thecompany has now become poorer by 250 m since the amount has been expended but there is no return.
3: In year 3, amount spent = 250 m , assets received = 250*75% = 187.50, Earnings improvement = 75 m. Hence total return = 262.50 with an investment of 250m. So the companyhas now become richer by $12.50 m
