You have the following information about Burgundy Basins, a sink manufacturer.
Equity shares outstanding | 20 million |
Stock price per share | $40.00 |
Yield to maturity on debt | 7.5% |
Book value of interest-bearing debt | $320 million |
Coupon interest rate on debt | 4.8% |
Market value of debt | $290 million |
Book value of equity | $500 million |
Cost of equity capital | 14% |
Tax rate | 35% |
Burgundy is contemplating what for the company is an average-risk investment costing $40 million and promising an annual after-tax cash flow of $6.4 million in perpetuity.
a. What is the internal rate of return on the investment?
b. What is Burgundy’s weighted-average cost of capital?
c. If undertaken, would you expect this investment to benefit shareholders? Why or why not?
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