You have recently been hired by Goff Telecommunications Testing Ltd (GTT). GTT was founded eight years ago by Chris Goff, and currently operates 74 units in the United Kingdom. GTT is privately owned by Chris and his family and had sales of $97 million last year. GTT develops hardware/software solutions and test methodologies to help shorten customer product development cycles whilst reducing cost and risk. GTT's growth to date has been financed from its profits. Whenever the company had sufficient capital, it would open a new unit. Relatively little formal analysis has been used in the capital budgeting process. Chris has just read about capital budgeting techniques and has come to you for help. The company has never attempted to determine its cost of capital, and Chris would like you to perform the analysis. Because the company is privately owned, it is difficult to determine the cost of equity for the company. You have determined that to estimate the cost of capital for GTT, you will use Spirent Communications plc as a representative company.

Using the information provided, answer the following questions:

I. Since we are looking at Spirent Communications Plc to arrive at suitable values for Goff Technological Printing (GTP) what approach are we in essence undertaking?

II. If Chris provides you with an estimated beta for Goff Technological Printing (GTP) of 1.2, the current risk- free rate is 4% and the return on the market is 9%, what would the expected return for GTP be?

III. In discussing cost of capital with Chris, he says from his reading on the internet that the cost of capital depends mainly on the source of funds and not the use of funds.Is this statement correct?