Determine current cost of equity, Financial Management

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Your task is to determine CDW's current cost of equity. Since the company is not yet publicly traded , you need to estimate its cost of equity from a set of comparable companies. Use ‘Hamada's Equation' to adjust for the impact of corporate debt on a firm's cost of equity.

Assume that CDW's target debt ratio, D/(E+D), is similar to its ratio of ‘long-term liabilities' to ‘total assets', that is, $3.731B/$5.700B ≈ 65%.

Question 1: While adjusting for each firm's debt level, estimate CDW's cost of equity based on the following 5 companies:

Apple Inc. (AAPL)
Dell Inc. (DELL)
EMC Corporation (EMC)
SanDisk Corp. (SNDK)
Seagate Technology Public Limited Company (STX)

Question 2: Select your own set of comparable companies and re-estimate CDW's cost of equity.

Question 3: Explain why the set of comparables you selected is preferable to the set listed in Question 1.

Question 4: Explain how you forecast the risk-free rate (rf) and the excess return on the market (rmkt-rf).


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