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# HP Inc. (HPQ)

## Dividend Discount Model (DDM)

Difficulty: Intermediate

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

### Intrinsic Stock Value (Valuation Summary)

HP Inc., dividends per share (DPS) forecast

USD \$

Year Value DPSt or Terminal value (TVt) Calculation Present value at
0 DPS01
1 DPS1 = × (1 + )
2 DPS2 = × (1 + )
3 DPS3 = × (1 + )
4 DPS4 = × (1 + )
5 DPS5 = × (1 + )
5 Terminal value (TV5) = × (1 + ) ÷ ()
Intrinsic value of HP Inc.’s common stock (per share) \$
Current share price \$

Based on: 10-K (filing date: 2018-12-13).

1 DPS0 = Sum of last year dividends per share of HP Inc.’s common stock. See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF Expected rate of return on market portfolio2 E(RM) Systematic risk (β) of HP Inc.’s common stock βHPQ Required rate of return on HP Inc.’s common stock3 rHPQ

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

Calculations

3 rHPQ = RF + βHPQ [E(RM) – RF]
= + []
=

### Dividend Growth Rate (g)

#### Dividend growth rate (g) implied by PRAT model

HP Inc., PRAT model

Average Oct 31, 2018 Oct 31, 2017 Oct 31, 2016 Oct 31, 2015 Oct 31, 2014 Oct 31, 2013
Selected Financial Data (USD \$ in millions)
Cash dividends declared
Net earnings
Net revenue
Total assets
Total HP stockholders’ equity (deficit)
Ratios
Retention rate1
Profit margin2
Asset turnover3
Financial leverage4
Averages
Retention rate
Profit margin
Asset turnover
Financial leverage
Dividend growth rate (g)5

Based on: 10-K (filing date: 2018-12-13), 10-K (filing date: 2017-12-14), 10-K (filing date: 2016-12-15), 10-K (filing date: 2015-12-16), 10-K (filing date: 2014-12-18), 10-K (filing date: 2013-12-30).

2018 Calculations

1 Retention rate = (Net earnings – Cash dividends declared) ÷ Net earnings
= () ÷ =

2 Profit margin = 100 × Net earnings ÷ Net revenue
= 100 × ÷ =

3 Asset turnover = Net revenue ÷ Total assets
= ÷ =

4 Financial leverage = Total assets ÷ Total HP stockholders’ equity (deficit)
= ÷ =

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= × × × =

#### Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$ × – \$) ÷ (\$ + \$) =

where:
P0 = current price of share of HP Inc.’s common stock
D0 = last year dividends per share of HP Inc.’s common stock
r = required rate of return on HP Inc.’s common stock

#### Dividend growth rate (g) forecast

HP Inc., H-model

Year Value gt
1 g1
2 g2
3 g3
4 g4
5 and thereafter g5

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= + () × (2 – 1) ÷ (5 – 1) =

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= + () × (3 – 1) ÷ (5 – 1) =

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= + () × (4 – 1) ÷ (5 – 1) =