Question

Assume that a national restaurant chain called BBQ builds 10 new restaurants at a cost of \(1 million per restaurant. It outfits each restaurant with an additional \)200,000 of equipment and furnishings. To help partially defray the cost of this expansion, BBQ issues and sells 200,000 shares of stock at $30 per share. What is the amount of economic investment that has resulted from BBQ’s actions? How much purely financial investment took place?

Short answer

$12 million is the economic investment that has resulted from BBQ’s action.

$6 million of purely financial investment took place.

Step-by-step solution

Economic investment by BBQ

Economic investment is the amount of money used to increase the productivity or output of the economy. Since BBQ builds 10 new restaurants at the cost of $1 million per restaurant, the total capital investment in all restaurants by BBQ is $1 million × 10 = $10 million.

Also, the BBQ makes an additional investment of $200,000 on each restaurant to increase the productivity of restaurants. Therefore, total economic investment in all the restaurants is

$200,000 × 10 = $2,000,000.

Hence, the total economic investment by BBQ is $(10 +2=)12 million.

Financial investment by BBQ

The financial investment includes investment in bonds, shares, real estate, or any financial assets. The cost per share is $30, and the total shares issued are 200,000.

Thus, the total funds raised from shares are

$30 × 200,000 = $6,000,000.

Therefore, purely financial investment accounts for $6 million.