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XY Co. has 14 million ordinary shares on Issue. It also has 210,000 bonds outstanding with a coupon rate of 10% paid half yearly, and

XY Co. has 14 million ordinary shares on Issue. It also has 210,000 bonds outstanding with a coupon rate of 10% paid half yearly, and a par value of $100 each. The ordinary shares currently sell for $3.40 per share and have a beta of 1.15, and the bonds have 17 years to maturity and sell for 91% of par value. The market risk premium is 8.5%, Government Treasury bills are yielding 4%, and the company's tax rate is 30%.

  1. What discount rate should the company apply to a new project's cash flows if it has the same risk as the company's current operations?
  2. Suppose another project that the company is evaluating has a beta of 0.90. What discount rate should be applied to valuing this project? Comment on any differences in your results compared to part a).
  3. Suppose the company expects to incur flotation/issue costs in raising new capital to invest in new projects. Will this impact on discount rates?

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