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What is the internal rate of return on the investment

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Reference no: EM13509220

You have the following information about Constance Security, a lock manufacturer:

Equity Shares Outstanding

10 million

Stock price per share

$20.00

Yield to maturity on debt

8.00%

Book value of interest-bearing debt

$135 million

Coupon interest rate on debt

6.00%

Market value of debt

$130 million

Book value of equity

$80 million

Cost of equity capital

12%

Tax rate

40%

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 Constances weighted average cost of capital? c. If undertaken, would you expect this investment to benefit shareholders? Why or Why not?

Reference no: EM13509220

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