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apr 2020 q6 ib

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dimitris13

Member
hi there,

what does "gear up the returns" mean?

thanks
 
I think the examiners are simply saying increase the returns on the money ChocCo invests.

Eg imagine the US Co costs $1,000m and produces a profit of $100m. If ChocCo spends $1000m of its own money on the US Co, the return it gets on that money is 100/1000 = 10%. However, if ChocCo spends only $500m of its own money on the US Co and funds the other $500m by issuing debt, then (ignoring factors such as the interest on the debt), it gets a return of 10/500 = 20% on the money it invests.

Hope that helps
Gresham
 
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