Question

You have the following information about Burgundy Basins, a sink manufacturer. Equity shares outstanding 20 million...

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

Equity shares outstanding 20 million
Stock price per share $ 39
Yield to maturity on debt 7.5 %
Book value of interest-bearing debt $ 350 million
Coupon interest rate on debt 4.4 %
Market value of debt $ 245 million
Book value of equity $ 410 million
Cost of equity capital 11.8 %
Tax rate 35 %

Burgundy is contemplating what for the company is an average-risk investment costing $38 million and promising an annual ATCF of $4.9 million in perpetuity.

a. What is the internal rate of return on the investment? (Round your answer to 2 decimal places.)

b. What is Burgundy's weighted-average cost of capital? (Round your answer to 2 decimal places.)

Homework Answers

Answer #1

a

IRR = ATCF/cost = 4.9/38=12.90%

b

MV of shares = price*shares = 20*39=780m

Total Capital value = Value of Debt + Value of Equity
=245+780
=1025
Weight of Debt = Value of Debt/Total Capital Value
= 245/1025
=0.239
Weight of Equity = Value of Equity/Total Capital Value
= 780/1025
=0.761
After tax cost of debt = cost of debt*(1-tax rate)
After tax cost of debt = 7.5*(1-0.35)
= 4.875
WACC=after tax cost of debt*W(D)+cost of equity*W(E)
WACC=4.88*0.239+11.8*0.761
WACC =10.15%
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