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# HP Inc. (HPQ)

## Present Value of Free Cash Flow to the Firm (FCFF)

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. Free cash flow to the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

### Intrinsic Stock Value (Valuation Summary)

HP Inc., free cash flow to the firm (FCFF) forecast

USD \$ in millions, except per share data

Year Value FCFFt or Terminal value (TVt) Calculation Present value at
01 FCFF0
1 FCFF1 = × (1 + )
2 FCFF2 = × (1 + )
3 FCFF3 = × (1 + )
4 FCFF4 = × (1 + )
5 FCFF5 = × (1 + )
5 Terminal value (TV5) = × (1 + ) ÷ ()
Intrinsic value of HP Inc.’s capital
Less: Short- and long-term debt (fair value)
Intrinsic value of HP Inc.’s common stock
Intrinsic value of HP Inc.’s common stock (per share) \$
Current share price \$

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

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.

### Weighted Average Cost of Capital (WACC)

HP Inc., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value)
Short- and long-term debt (fair value) = × (1 – )

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

1 USD \$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= × \$ = \$

Short- and long-term debt (fair value). See Details »

2 Required rate of return on equity is estimated by using CAPM. See Details »

Required rate of return on debt. See Details »

Required rate of return on debt is after tax.

Estimated (average) effective income tax rate
= ( + + + + + ) ÷ 6 =

WACC =

### FCFF Growth Rate (g)

#### FCFF 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)
Interest expense on borrowings
Net loss from discontinued operations
Net earnings
Effective income tax rate (EITR)1
Interest expense on borrowings, after tax2
Interest expense (after tax) and dividends
EBIT(1 – EITR)3
Notes payable and short-term borrowings
Long-term debt, excluding current portion
Total HP stockholders’ equity (deficit)
Total capital
Ratios
Retention rate (RR)4
Return on invested capital (ROIC)5
Averages
RR
ROIC
Growth rate of FCFF (g)6

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

2 Interest expense on borrowings, after tax = Interest expense on borrowings × (1 – EITR)
= × (1 – ) =

3 EBIT(1 – EITR) = Net earnings – Net loss from discontinued operations + Interest expense on borrowings, after tax
= + =

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [] ÷ =

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × ÷ =

6 g = RR × ROIC
= × =

#### FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × ( × ) ÷ ( + ) =

where:
Total capital, fair value0 = current fair value of HP Inc.’s debt and equity (USD \$ in millions)
FCFF0 = last year HP Inc.’s free cash flow to the firm (USD \$ in millions)
WACC = weighted average cost of HP Inc.’s capital

#### FCFF 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 single-stage 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) =