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Determine current cost of equity

Your task is to determine CDW’s current cost of equity. Since the company is not yet publicly traded^{1}, you need to estimate its cost of equity from a set of comparable companies. Use ‘Hamada’s Equation’^{2} to adjust for the impact of corporate debt on a firm’s cost of equity. Assume that CDW’s target debt ratio^{3}, D/(E+D), is similar to its ratio of ‘long-term liabilities’ to ‘total assets’, that is, $3.731B/$5.700B ≈ 65%.

[1 CDW’s Form S-1 filing: www.sec.gov/Archives/edgar/data/1402057/000119312513122411/d501911ds1.htm]

[2 Hamada’s equation is explained at http://en.wikipedia.org/wiki/Hamada's_equation]

[3 The target debt ratio, D/(E+D), is different from the target debt-to-equity ratio, D/E!]

**Question1 )** 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 (r_{f}) and the excess return on the market (r_{mkt}-r_{f}).

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## Answer

**Course:** Other Management

**Ref. No:-** TGS0467

**Length:** 7 pages