Hewlett Packard’s stock price on October 31, 2006 was $38.74.
The median price
to earnings ratio in the 1990s for electronic and electric equipment firms, a category that
might include HP, was 15.3.
For all questions where it is relevant assume that the
required rate of return on an equity investment in HP (r) is 0.11 (11%).
Use HP’s financial statements to answer these questions.
statements, which we used in an earlier homework, include the press release for HP that
accompanied the release of its 2007 third quarter financial statements.
Calculate earnings per share for 2006.
Earnings = $6,198,000,000
Number of Shares Outstanding = 2,732,000,000
EPS = Earnings / Shares Outstanding
EPS = 6198000000 / 2732000000 = 2.268
Estimate the value of Hewlett Packard using the median industry price to earnings
ratio as the appropriate multiple.
Median industry price = 15.3
$2.269 X 15.3 = $34.71 per share
Calculate HP’s book value per share for 2006.
Book Value = $38,144,000,000
BV/share = BV / # Shares = $38,144,000,000 / $2,732,000,000 = $13.962
Calculate the market value of Hewlett Packard.
Market Value = Number shares * Price = $105,838,000,000
Calculate the price to earnings ratio using 2006 earnings.