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

Question

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

Equity shares outstanding 20 millions

Stock price per share $40.00

Yield to maturity on debt 7.5%

Book value of interest-bearing debt $320 million

Coupon interest 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 after-tax-cash flow of $6.4 milion in perpetuity.

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

Explanation / Answer

1) IRR: Present value of perpertuity: p=1/r =1/0.048(CONSIDERED INTEREST RATE AS A DISCOUNT RATE) IRR=20.83

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