Systematic Comparable Company Analysis and Computation of Cost of Equity using Clustering

Abstract

Computing cost of equity for private corporations and performing comparable company analysis (comps) for both public and private corporations is an integral but tedious and time-consuming task, with important applications spanning the finance world, from valuations to internal planning. Performing comps traditionally often times include high ambiguity and subjectivity, leading to unreliability and inconsistency. In this paper, I will present a systematic and faster approach to compute cost of equity for private corporations and perform comps for both public and private corporations using spectral and agglomerative clustering. This leads to a reduction in the time required to perform comps by orders of magnitude and entire process being more consistent and reliable.