Kratos Defense and Security Solutions, Inc is a smaller defence contractor with 34000 employees,…

Kratos Defense and Security Solutions, Inc is a smaller defence contractor with 34000 employees, a market capitalization of 2.5 Billion dollars and debt of 300 Million Dollars. Annual Revenue is around 800 Million Dollars and growing at <10% per Annum; EBIT is low at 30 Million Dollars, both relative to competitors as well as its own sales, and has been even lower in previous years.

Kratos Bids on contracts from military and government agencies (in the US mostly) to do research into or to build new weapons systems., Its expertise lies in niche areas such as unmanned drones, energy weapons and cyber security. By being known for certain specialities, it can compete at a small scale with the defence leaders such as Lockheed Martin (100 Billion Dollar Valuation; 65 Billion Dollar Revenue). It has multi-year contracts with several military branches and law enforcement agencies, either alone or in joint ventures with other contractors. A typical contract will guarantee a certain minimum amount of funding upfront and will likely contain provisions for additional payments to the contractor when milestones are reached. Every few years, a contract will be up for review/renewal, but governments rarely cancel ongoing contracts unless egregious errors or flagrant cost overruns become public.

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1. Using the information provided, analyse each of the 2 dimensions of business risk of the company. Is Sales risk high or low, and why? (3 marks). Is Operational risk high or low, and why? (3 marks).

2. Based on your answer to (1.) and from what you can determine about the current capital structure of the company. Provide arguments why the company:

– Could potentially add debt

– why it should NOT add debt; or

– why it should even think about reducing debt (assuming it has any

What would you advise overall? Please state your reasoning clearly. (2 marks)

Please ensure explanations are professional with well reasoned arguments (2 marks).