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Qinetiq plc. makes full body scanners for airport security systems. The Transportation Security Administration (TSA)...

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Question

Finance

Qinetiq plc. makes full body scanners for airport security systems. The Transportation Security Administration (TSA) is considering ordering 100 such machines at a total cost of $20 million. To ramp up production for the order Qinetiq is considering building a new factory. To evaluate the new factory project, Qinetiq needs to estimate its cost of capital. Review the following information and answer the questions that follow to help Qinetiq with its analysis.

Debt

Equity

Number of bonds outstanding =

100,000

Market price =

$46

Face value =

$1,000

Shares outstanding =

6

million

Maturity =

3

years

Beta =

0.85

Coupons =

8%

paid annually

Risk-free rate =

6%

Market price =

$1,021.37

Expected return on market =

10%

Tax rate =

30%

a.What is the after-tax cost of debt for Qinetiq bonds?

b.

According to the CAPM, what is the required return of Qinetiq shareholders?

c.What is the weighted average cost of capital (WACC) for Qinetiq?

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