You have the following information about Constance Security, a lock manufacturer:
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Equity Shares Outstanding
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10 million
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Stock price per share
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$20.00
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Yield to maturity on debt
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8.00%
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Book value of interest-bearing debt
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$135 million
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Coupon interest rate on debt
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6.00%
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Market value of debt
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$130 million
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Book value of equity
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$80 million
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Cost of equity capital
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12%
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Tax rate
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40%
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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?