You have the following information about Burgundy Basins, a sink manufacturing company.

Equity shares outstanding….20 million

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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 of 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?


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