White Lion Homebuilders is considering investing in a one-year project that requ

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 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 White Lion expects to earn on its project (net of its flotation costs) is (rounded to two decimal places), Alpha Moose Transporters 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 Alpha Moose expects to incur flotation costs of 6.50% 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 White Lion Homebuilders Co.'s addition to earnings for this year is expected to be $745,000. Its target capital structure consists of 35% debt, 5% preferred, and 60% equity. Determine white Lion Homebuilders's retained earnings breakpoint: $1,552,084 O $1,241,667 O $2,128,571 O $1,427,917 Flash Player WIN 30,0,0,3 13 3341 2004-2016 Apla All rights reserved 2013 Cengage Learming except as noted Alll rights reserved Grade It Now ?? 45

Explanation / Answer

1) Investment for Project $475000 Floatation cost for issue 2%*475000 $9500 Total cash outflow 484500 Cash inflow from project $550000 Rate of return 1- (550000/484500) 1.135191 The rate of return from project is 13.52% 2) Current stock price 33.35 dividend next yr 1.36 dividend growth rate 9.40% floatation costs 6.50% Cost of equity would be D1/(P0(1-F)) + g 1.36/(33.35*(1-0.065))+ 0.094 13.76% 3) Next year earnings would be $745000 35% debt 5% preferred 60% equity The retained earnings breakpoint means the amount of capital it can raise before issuing new stock Breakpoint = 745000/0.60 1241666.667

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