Question
Corporation Mega has a two-year investment that costs $120,000 to invest today, generates a quarterly cash inflow of $2,500, and has a resale value of
Corporation Mega has a two-year investment that costs $120,000 to invest today, generates a quarterly cash inflow of $2,500, and has a resale value of $160,000 after two years. To fund the investment, the corporation has $20,000 itself today, and needs to finance the rest $100,000. It plans to finance 40% of the $100,000 through issuing stocks and it will purchase back all these stocks after two years when the project ends. And Mega will finance the left 60% through a two-year bond. The stock is issued at $80 per share, pays a quarterly dividend at an amount of .5% of the initial stock price, and the stock price is expected to grow by 100% after two years. The bond price is $600 with a face value of $650 and semiannual coupon payments at an annual coupon rate of 6%. What is the internal rate of return (IRR) for this two-year investment considering the financing costs? Please round your answers to the nearest .01% for the IRR. 24 points
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