Booyah is a publicly traded company that sells both computer hardware and services. It has no...

Booyah 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:

Business Revenues (in $ millions) Enterprise Value/Sales Unlevered Beta

Computer hardware $800 0.7 1.22

Computer services $500 1.9 0.7

The company also provides the breakdown of revenues geographically:

Country	Riskfree rate In local currency	Equity Risk Premium	Marginal tax rate	Total Revenues (in $ millions)
United States	4.00%	6.00%	40.00%	$ 650
China	5.00%	8.00%	25.00%	$ 650

A) Estimate the cost of equity in US dollars for Booyah

B) Now assume that Booyah 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 $280 million in the US and invest the total amount in computer services in China. Estimate the cost of equity in US $ for Booyah after the transaction.

Expert Solution

		Sector Averages
Business	Revenues (in $ millions)	Enterprise Value/Sales	Unlevered Beta
Computer hardware	$800	0.70	1.22
Computer services	$500	1.90	0.7

Country	Risk free rate In local currency	Equity Risk Premium	Marginal tax rate	Total Revenues
United States	4.00%	6.00%	40%	$650.00
China	5.00%	8.00%	25%	$650.00

Risk free rate =	3.00%
To compute beta
Business	Estimated Value	Weight	Unlevered Beta
Computer hardware	$560.00	0.370860927	1.22
Computer services	$950.00	0.629139073	0.7
	$1,510.00		0.892847682
To compute ERP
Country	ERP	Revenues	Weights
United States	6.00%	$650.00	0.5
China	8.00%	$650.00	0.5
	7.00%	$1,300.00
Cost of equity in US $ =	9.25%
Part b
First, estimate the divestiture value
Hardware revenues in US =	$400
Estimated value =	$280.00
Debt raised =	$280.00
Invested in China services=	$560.00
Incremental revenue	$294.74	! Invested value/ EV to Sales of sector

Business	Estimated value	Weight	Unlevered Beta
Computer hardware	$280.00	15.64%	1.22
Computer services	$1,510.00	84.36%	0.7
			0.7813
New D/E ratio =	18.54%	! Debt raised/Old value
Levered Beta =	0.8683	! Use US marginal tax rate, since borrowing is in US.
		Tax benefits are also in US.
To compute ERP
Country	ERP	Revenues	Weghts
United States	6.00%	$250.00	21%
China	8.00%	$944.74	79%
	7.58%
Cost of equity in US $ =	9.58%

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