1 Alliant Technology is a publicly traded company that sells

1. Alliant Technology is a publicly traded company that sells both computer hardware It has no debt outstanding or cash. In the most recent year, the company information about its two businesses reported the following Business Computer hardware $1,000 Enterprise Value/Sales means the rate of real value generated by the given volume The company also provides the breakdown of revenue seographically Country Total Risk free rate in 300% (USSI - 4 00% ruanl Equity Risk of China 7.00% Both countries have the same mix of hardware and service business. Estimate the cost of equity in US dollars for Alliant Technology

Solution

Cost of Equity = Risk-free rate + (Beta*Equity Risk Premium)

Since the revenue generated in both the geographies are equal with same mix of hardware and service business, all the factors required to determine the cost of equity will be average of both the countries.

Risk-free rate = (3%+4%)/2 = 3.5%
Beta = (1.25+0.9)/2 = 1.075
Equity Risk Premium = (5%+7%)/2 = 6%

Cost of Equity = 3.5%+(1.075*6%) = 9.95%

Cost of Equity in US dollars = 9.95% * ($800+$800) = $159.2 million