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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%.
- 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?
- 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).
- 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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