You have the following information about Burgundy Basins, a sink manufacturing company.
Equity shares outstanding....20 million
Stock price per share ..........$40
Yield to maturity on debt.......7.5%
Book value of interest bearing debt ....$320 million
Coupon Interests 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 ATCF 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 benifit share holders? Why or why not?