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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