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 share- holders? Why or why not?