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Question - XYZ Co. has on its balance sheet 17,000 4.9% coupon bonds outstanding having $2,000 face value, yielding 4.5% to maturity. It also has 425,000 shares of face value $10, selling for $67 per share. The equity beta of the company stands at 0.88. The market yields 7% return and the treasury bills yield 3.5% p.a.
Required -
a. Compute the WACC for XYZ Co.
b. XYZ Co. is planning to expand into a new product line that is based on an upcoming technology that is not yet fully evolved but holds a lot of promise. How should the company go about deciding the hurdle rate to be used for investments in this new business? (No calculations required).
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