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Alpha Moose Transporters is considering investing in a one-year project that requires an initial investment of $500,000. To do so, it will have to issue new common stock and will incur a flotation cost of 2.00%. At the end of the year, the project is expected to produce a cash inflow of $595,000. The rate of return that Alpha Moose expects to earn on its project (net of its flotation costs) is __________(rounded to two decimal places).

Respuesta :

Answer:

The rate of return that Alpha Moose expects to earn on its project (net of its flotation costs) is 16.62%

Explanation:

To find out rate of return, first we have to compute the stock without flotation cost, as flotation cost is not included.

So, common stock = Initial investment ÷ (100%- Flotation cost)

                               = $500,000 ÷ (100% -2%)

                               = $500,000 ÷ 98%

                               = $510,204

And, the cash inflow is = $595,000

Assume 100% common stock value.

So, the expected return in value =  Cash inflow - Initial investment after considering flotation cost

                                                      = $595,000 - $510,204

                                                      = $84796

And, the expected return in percentage = Expected return in value ÷ Initial investment after considering flotation cost

= $84796 ÷ $510,204

= 16.62%

Hence, the rate of return that Alpha Moose expects to earn on its project (net of its flotation costs) is 16.62%

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