Question

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​ =	​$50
Face value​ =	​$1,000	Shares outstanding​ =	7 million
Maturity​ =	5 years	Beta​ =	0.82
Coupons​ =	10​% paid annually	​Risk-free rate​ =	3​%
Market price​ =	​$1,010.76	Expected return on market​ =	9​%
Tax rate​ =	38​%

​Round two decimal

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?

Answer 1

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