PQL Airlines is developing a new baggage check in system that will automate the process. The airlines will use retained earnings to fund the project. Currently, there are 2,550,000 shares of stock outstanding selling for $27 per share. They expect to pay a dividend of $2.50 per share and they expect to increase these dividends at a rate of 2.2% per year for the foreseeable future. The U.S. Treasury in currently paying 1.25% and the market risk premium is 8.5%. Because volatility in the airline industry, PQL Airlines has a very high beta of 1.8. There is currently $60 million worth of debt outstanding. These bonds are currently trading at 92% of par. The bonds have a 4.5% semi annual coupon annual rate with 10 years remaining. The corporate tax rate is 30%. The Airlines will finance the expansion with both debt and equity and maintain the same capital structure. What is the cost of equity? What is the cost of debt? 2. What is the Weighted Average Cost of capital for PQL Airlines? 3. The baggage check system is expected to cost is expected to cost $2,000,000 and they believe will be functional for 5 years. This system will be classified as a 3 year asset for MACRS (table is provided below) and they expect to sell the physical part of the system after that point for $50,000. While this system would not necessary generate any additional revenue from passengers, there would be able to license the system to other airlines and expect to generate licensing revenues of $800,000 a year. In addition, there is an expected reduction in labor cost of $35,000 annually. Compute the following: NPV IRR Discounted Payback Profitability Index What is your recommendation for PQL Airlines and why? MACRS: Year 1 33%; Year 2 45%; Year 3 15%; Year 4 7%