1. Alliant Technology is a publicly traded company that sells both computer hardware and services. It has no debt outstanding or cash. In the most recent year, the company reported the following information about its two businesses: Sector Averages Business Revenues (in $ millions) Enterprise Value/Sales Unlevered Beta Computer hardware $1,000 0.80 1.25 Computer services $600 2.00 0.9 The company also provides the breakdown of revenues geographically: Country Risk free rate In local currency Equity Risk Premium Marginal tax rate Total Revenues (in $ millions) United States 3.00% (US $) 5.00% 40% $800.00 China 4.00% (Yuan) 7.00% 25% $800.00 Both countries have the same mix of hardware & service businesses.

a. Estimate the cost of equity in US dollars for Alliant Technology (2 points)

b. Now assume that Alliant wants to sell just its hardware business in the United States at fair value (based on the EV/Sales ratio for the sector) in the United States, borrow an additional $400 million in the US and invest the total amount in computer services in China. Estimate the cost of equity in US $ for Alliant after the transaction. (3 points)