You have the following information about Constance Security,

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?

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