Your task is to determine CDW’s current cost of equity. Since the company is not yet publicly traded1, 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 ratio3, 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 (rf) and the excess return on the market (rmkt-rf).
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