Look at the information below about Burgundy Basins, a sink manufacturer.
Equity Shares outstanding 15 million
Stock price per share $25.00
Yield to maturity on debt 7%
Book value of interest-bearing debt $255 million
Coupon interest rate on debt 5%
Market value of debt $250 million
Book value of equity $200 million
Cost of equity capital 12%
Tax rate 35%
Burgundy is contemplating what for the company is an average-risk investment costing $25 million and promising an annual after-tax cash flow of $3.5 million in perpetuity.
Problem 1: What is the internal rate of return on the investment?
Problem 2: What is Burgundy's weighted-average cost of capital?
Problem 3: If undertaken, would you expect this investment to benefit shareholders? Why or why not?