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IRR & WACC Calculations - Burgundy Basins

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.

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?

Solution Preview

a. What is the internal rate of return on the investment?

For a perpetuity, the internal rate of return = Cash Flow/Investment
IRR = 3.5/25 = 14%

b. What is Burgundy's weighted-average cost of capital?

WACC = Proportion of debt X after tax cost of debt + proportion of ...

Solution Summary

The solution explains how to calculate the WACC for the company and the IRR for an investment proposal.

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