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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?

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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.

$2.19