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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 Number of bonds outstanding? = 250,000Face value? = ?$1,000Maturity? = 5 yearsCoupons? = 7?% paid annuallyMarket price? = ?$1,016.43Tax rate? = 25?%Equity Market price? = ?$31 Shares outstanding? = 5 million Beta? = 1.14 ?Risk-free rate? = 4?% Expected return on market? = 10?%
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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