Question

White Lion Homebuilders is considering investing in a one-year project that requires an initial investment of $475,000. 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:___________.

Answer 1

22.81%

Step-by-step explanation:

The computation of the rate of return is shown below:

= (cash inflow ÷ total cost) - 1

where,

Cash inflow is $595,000

And, the total cost is

= $475,000 + $475,000 × 2%

= $475,000 + $9,500

= $484,500

So, the rate of return is

= ($595,000 ÷ $484,500) - 1

= 22.81%

Hence, the rate of return is 22.81%

Basically we applied the above formulas