Now you need to estimate FVW$$s cost of equity. Once again, the problem is that it is a private company, so its equity returns are not directly observable. This means that you cannot use OLS regression to estimate FVW$$s beta directly. As before, you decide to follow a peer firm approach, using the same three comparison firms as before. Your plan is to estimate the equity beta for each of those firms, and then to convert their equity betas into unlevered betas. Thereafter, you intend to calculate an average of the unlevered betas for the comparison firms, which you will use as a proxy for FVW$\text{'}$s unlevered beta. Next, you plan to convert this proxy unlevered beta into an equity beta for FVW$,$ using its debt$-$to$-$equity ratio. Finally, the estimated value for FVW$$s equity beta will be used to determine its cost of capital.

The worksheet Market Data contains monthly observations for the Interbank Overnight Cash Rate $($ONCR$),$ for the period from January $2015$ to April $2023,$ as well as monthly values for the S&P$/$ASX$300$ Index $($XKO$),$ and monthly share prices for Australian Vintage $($AVG$),$ Lark Distilling $($LRK$),$ and Treasury Wine Estates $($TWE$).$ The cash rate data was downloaded from the website of the Reserve Bank of Australia, and everything else was download from Yahoo Finance. The index values and the share prices have been adjusted for dividends, so the price returns you calculate using that data will include the effect of dividends. Use the data in Market Data worksheet to estimate the equity betas for the three comparison firms. To unlever those betas, you will need the debt$-$to$-$equity ratios for the comparison firms. The easiest way to get them is by clicking FINANCIALS tab on the Wall Street Journal page for each of the firms. This will take you to a page that presents the financial ratios for the firm. Once you have obtained FVW$$s unlevered beta, as a weighted average of the unlevered betas of the comparison firms, and you have used FVW$$s debt$-$to$-$equity ratio to convert its unlevered beta back into a $($levered$)$ equity beta, you are ready to use the SML equation to calculate its cost of equity. For this you will need estimates for the risk$-$free rate and the risk premium on the market portfolio in Australia. These values can be obtained from MarketRiskPremia.com.