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 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 $550,000. The rate of return that Alpha Moose expects to earn on its project (net of its flotation costs) is (rounded to two decimal places). Sunny Day Manufacturing Company has a current stock price of $33.35 per share, and is expected to pay a per-share dividend of $1.36 at the end of next year. The company's earnings' and dividends' growth rate are expected to grow at the constant rate of 9.40 % into the foreseeable future. If Sunny Day expects to incur flotation costs of 5.00% of the value of its newly-raised equity funds, then the flotation-adjusted (net) cost of its new common stock (rounded to two decimal places) should be Alpha Moose Transporters Co.'s addition to earnings for this year is expected to be $745,000. Its target capital structure consists of 40% debt, 5 % preferred, and 55% equity . Determine Alpha Moose's retained earnings breakpoint:. $1,354,545 $1,625,454 $1,490,000 $$1,862,500.00

Answer 1

Total amount raised = Initial investment/(1-Flotation cost)

= 500,000/(1-2%)

= $510,204.08

Rate of return = (550,000-510,204.08)/510,204.08

= 7.8%

Price of share(1-Flotation cost) = Expected Dividend/(Cost – Growth rate)

33.35(1-5%)= 1.36/(Cost – 9.4%)

Cost = 13.69%

Retained earnings breakpoint = Addition to earnings/Share of Equity

= 745000/55%

= $1,354,545