XYZ Corp. has 10 million shares of common stock outstanding and 290,000 8% p.a. semi-annual bonds outstanding, par value of $1000 each. The common stock currently sells for $40 per share and has a beta of 2, bonds of 20 years to maturity and sell for 105% of par value. The market risk premium is 7% p.a. compounded semi-annually, T-bills are yielding 3.5% p.a. compounded semi-annually and XYZs tax rate is 35%.

If XYZ Co. is evaluating a new investment project that has the same risk as the firms typical project, what rate should the firm use to discount the projects CFs (rate expressed as p.a. compounded semi-annually) (Note: use APR value of ytm for the cost of debt) (nearest two decimal value)?

Select one:

a. 13.05%

b. 12.05%

c. 10%

d. 15.50%

e. None of these