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ACCT 110

ACCT 110 - Michael Samuels Accy 110 Jones Sixth Homework...

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Michael Samuels 11/18/08 Accy 110 Jones Sixth Homework 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. The financial 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. 1. 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 2. 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 3. 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 4. Calculate the market value of Hewlett Packard. Market Value = Number shares * Price = \$105,838,000,000 5. Calculate the price to earnings ratio using 2006 earnings.

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\$38.74 / \$2.269 = 17.08 6. Calculate the price to earnings ratio using 12 month trailing earnings.
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