Question

Bond issuance: 20% of total funds, requires 15% interest per year Bank loan: 60% of total funds, requires 9.5% interest per year Preferred Stock issuance: 20% of total funds, requires 5% dividend per year What is Valentino’s average rate of return on the new project?

Answer 1

Answer: 28.57%

Explanation:

Average return given the variables will be;

$Average rate of return = \frac{Annual net income}{Average investment}$

Average rate of return = $\frac{1,000,000}{\frac{7,000,000}{2} }$

Average rate of return  = 1,000,000/3,500,000

Average rate of return = 28.57%