Question

White Lion Homebuilders 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 White Lion expects to earn on its project (net of its flotation costs) is ____ (rounded to two decimal places).

Answer 1

16.62%

Step-by-step explanation:

For computing the rate of return, first we have to find out the issue amount which is shown below:

= Initial investment ÷ ( 1 - flotation cost)

= $500,000 ÷ (1 - 2%)

= $510,204.80

Now the rate of return would be

= (Cash inflow ÷ Issued amount) - 1

= ($595,000 ÷ $510,204.80) - 1

= 16.62%

The flotation cost should always be deducted