Question

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).

Answer 1

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

Step-by-step 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%