H-P executives indicate that they use traditional discounted cash flow (DCF) analysis to evaluate investment projects and
Question:
H-P executives indicate that they use traditional discounted cash flow (DCF) analysis to evaluate investment projects and that the firm's cost of capital is about 12 percent. On October 15, 2003, H-P's forward P/E ratio was 16.1, less than its historical value that stood around 20. H-P executives suggest that the lower P/E ratio reflected continued investor uncertainty about whether or not the merger would be successful. Discuss the manner in which H-P executives valued the expected cost savings stream when evaluating the merger. In particular address the following questions: Was the technique H-P executives used the same, or comparable, to traditional DCF analysis? Do you believe that H-P paid a reasonable premium for Compaq? Are there any valuation implications attached to H-P's P/E ratio being at 16 rather than 20?
Discounted Cash FlowsWhat is Discounted Cash Flows? Discounted Cash Flows is a valuation technique used by investors and financial experts for the purpose of interpreting the performance of an underlying assets or investment. It uses a discount rate that is most... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Step by Step Answer:
Cost management a strategic approach
ISBN: 978-0073526942
5th edition
Authors: Edward J. Blocher, David E. Stout, Gary Cokins