Qinetiq plc. makes full body scanners for airport security systems. The Transpor
ID: 2798051 • Letter: Q
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 =
4
Maturity =
6
Beta =
1.24
Coupons =
8%
Risk-free rate =
7%
Market price =
$1,013.37
Expected return on market =
12%
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?
a.What is the after-tax cost of debt for Qinetiq bonds?
nothing%
(Round to two decimal places.)
b.
According to the CAPM, what is the required return of Qinetiq shareholders?
nothing%
(Round to two decimal places.)
c.What is the weighted average cost of capital (WACC) for Qinetiq?
nothing%
(Round to two decimal places.)
Debt
Equity
Number of bonds outstanding =
100,000
Market price =
$50
Face value =
$1,000
Shares outstanding =
4
millionMaturity =
6
yearsBeta =
1.24
Coupons =
8%
paid annuallyRisk-free rate =
7%
Market price =
$1,013.37
Expected return on market =
12%
Tax rate =
30%
Explanation / Answer
B C D E F G H 2 (a) Cost of debt and market value 3 Price of bond = PV of cash flows discounted at Yield 4 1013.37 = 1000 x 8% x (PVAF YTM, 6) + 1000 x PVIF (YTM, 6) 5 1013.37 = 80 x PVAF(YTM, 36) + 1000/(1+YTM)^6 6 7 Using linear interpolation - 8 r= Price 9 7% 1047.67 =-PV(C9,6,80,1000) 10 r 1013.37 11 9% 955.14 =-PV(C11,6,80,1000) 12 13 r-7/9-7 = (1013.37 - 1047.67)/(955.14-1047.67) 14 r-3 = 0.37066 x 2 15 r = 7 + 0.7413 16 r = 7.7413 17 18 Post tax KD = 7.7413 x (1- 0.3) 5.41891 19 20 21 (b) Value of stock and Ke 22 Ke = Rf + (Rm-Rf) x B 23 Ke = 7 + (12 - 7) x 1.24 = 13.2 24 25 Market Value of shares = 50 x 4000000 200000000 26 Market value of bond = 1013.37 x 100000 1013370000 27 28 ( c) Securities Weights Cost W X C 29 (W) ( C) 30 Debt 1013370000 5.4189 5491360827 31 Stock 200000000 13.2000 2640000000 32 1213370000 8131360827 33 34 WACC = 8131360827/1213370000 35 6.7015 36