Hewlett-Packard (HP) | Weighted Average Cost of Capital | FIN6406-TH | | | |

Company/Industry Information
Hewlett-Packard Company or HP is a multinational American information technology corporation headquartered in Palo Alto, California. HP provides products, technologies, software, technical support and solutions to various consumer groups. These consumers include small- and medium-sized businesses (SMBs) and large enterprises, including customers in the government, health and education sectors.
HP specializes in developing and manufacturing computing, data storage, and networking hardware, designing software and delivering services. Major product lines include personal computing devices, enterprise, and …show more content…

For the purposes of our calculation we will use 2.09% as our risk-free rate.
We used the forward-looking risk premium model to help determine the market risk premium. Per Standard & Poors, as of December 2011 the projected dividend yield on the S&P 500 is = 2.0%. From 2008 to 2010, HP’s revenues grew approximately 6.5%. From 2009 to however this does not take into account inflation. Historically, inflation has been around 3%, so we will subtract 3% inflation from HP’s growth number to get a more reasonable long-term growth rate of 3.5%. We will use this as our estimate for the percentage growth. Our assumption is that the market is in equilibrium and that the required rate of return is equal to the market rate of return. So, plugging in our numbers for dividend yield and HP’s growth we can determine that rM=2.0% + 3.5%= 5.5%. Given the 10-year T-bond yield of 2.09%, we determine RPM to be 5.5%-2.09%=3.41%. In this instance, we would use 3.41% as the market risk premium.
We also calculated the market risk premium to take into consideration stock repurchases and non constant growth. Using the assumption that the company in aggregate will distribute about as many dollars via repurchases as via cash dividends, than the repurchase to dividend ratio would be approximately 1. Using the equation rM= (1+Rep/Div) D1/P0+g from Chapter 9 and using our previous estimates of the