11 May WHAT IS THE INTERNAL RATE OF RETURN ON THE INVESTMENT?
You have the following information about Constance Security, a lock manufacturer:Equity Shares Outstanding10 millionStock price per share$20.00Yield to maturity on debt8.00%Book value of interest-bearing debt$135 millionCoupon interest rate on debt6.00%Market value of debt$130 millionBook value of equity$80 millionCost of equity capital12%Tax rate40%Constance is contemplating an average-risk investment costing $15 million that promises an annual after-tax cash flow of $2 million in perpetuity. a. What is the internal rate of return on the investment? Hint: Use the perpetuity equation from Chapter 7’s DCF discussion. b. What is Constance%u2019s weighted average cost of capital? c. If undertaken, would you expect this investment to benefit shareholders? Why or Why not?You have the following information about Constance Security, a lock manufacturer:Equity Shares Outstanding10 millionStock price per share$20.00Yield to maturity on debt8.00%Book value of interest-bearing debt$135 millionCoupon interest rate on debt6.00%Market value of debt$130 millionBook value of equity$80 millionCost of equity capital12%Tax rate40%Constance is contemplating an average-risk investment costing $15 million that promises an annual after-tax cash flow of $2 million in perpetuity. a. What is the internal rate of return on the investment? Hint: Use the perpetuity equation from Chapter 7’s DCF discussion. b. What is Constance%u2019s weighted average cost of capital? c. If undertaken, would you expect this investment to benefit shareholders? Why or Why not?
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