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 Constance%u2019s weighted average cost of capital? c. If undertaken, would you expect this investment to benefit shareholders? Why or Why not?