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 = 250,000

Face value = $1,000

Maturity = 5 years

Coupons = 7% paid annually

Market price = $1,016.43

Tax 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 share holders?

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

Answer rating: 100% (QA)

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