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)
Weighted Average Cost of Capital (WACC)
FCFF Growth Rate (g)

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

US$ in millions, except per share data

Year	Value	FCFF_t or Terminal value (TV_t)	Calculation	Present value at 17.45%
0¹	FCFF₀	4,148
1	FCFF₁	5,570	= 4,148 × (1 + 34.27%)	4,743
2	FCFF₂	7,061	= 5,570 × (1 + 26.77%)	5,119
3	FCFF₃	8,422	= 7,061 × (1 + 19.27%)	5,198
4	FCFF₄	9,412	= 8,422 × (1 + 11.77%)	4,947
5	FCFF₅	9,814	= 9,412 × (1 + 4.26%)	4,392
5	Terminal value (TV₅)	77,613	= 9,814 × (1 + 4.26%) ÷ (17.45% – 4.26%)	34,732
Intrinsic value of HP Inc. capital				59,131
Less: Short- and long-term debt (fair value)				6,000
Intrinsic value of HP Inc. common stock				53,131

Intrinsic value of HP Inc. common stock (per share)				$35.85
Current share price				$18.09

Based on: 10-K (reporting date: 2018-10-31).

¹ 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.

HP Inc., cost of capital

	Value¹	Weight	Required rate of return²	Calculation
Equity (fair value)	26,808	0.82	20.57%
Short- and long-term debt (fair value)	6,000	0.18	3.49%	= 4.60% × (1 – 24.06%)

Based on: 10-K (reporting date: 2018-10-31).

¹ US$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 1,481,913,639 × $18.09
= $26,807,817,729.51

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
= (23.30% + 22.90% + 29.10% + 3.80% + 23.50% + 21.50%) ÷ 6
= 24.06%

WACC = 17.45%

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 (US$ in millions)
Interest expense on borrowings		312)	309)	273)	327)	344)	426)
Net loss from discontinued operations		—)	—)	(170)	—)	—)	—)
Net earnings		5,327)	2,526)	2,496)	4,554)	5,013)	5,113)

Effective income tax rate (EITR)¹		23.30%	22.90%	29.10%	3.80%	23.50%	21.50%

Interest expense on borrowings, after tax²		239)	238)	194)	315)	263)	334)
Add: Cash dividends declared		899)	894)	858)	1,219)	1,151)	1,074)
Interest expense (after tax) and dividends		1,138)	1,132)	1,052)	1,534)	1,414)	1,408)

EBIT(1 – EITR)³		5,566)	2,764)	2,860)	4,869)	5,276)	5,447)

Notes payable and short-term borrowings		1,463)	1,072)	78)	2,885)	3,486)	5,979)
Long-term debt, excluding current portion		4,524)	6,747)	6,758)	21,780)	16,039)	16,608)
Total HP stockholders’ equity (deficit)		(639)	(3,408)	(3,889)	27,768)	26,731)	27,269)
Total capital		5,348)	4,411)	2,947)	52,433)	46,256)	49,856)
Financial Ratios
Retention rate (RR)⁴		0.80	0.59	0.63	0.69	0.73	0.74
Return on invested capital (ROIC)⁵		104.08%	62.67%	97.03%	9.29%	11.41%	10.93%
Averages
RR	0.70
ROIC	49.23%

FCFF growth rate (g)⁶	34.27%

Based on: 10-K (reporting date: 2018-10-31), 10-K (reporting date: 2017-10-31), 10-K (reporting date: 2016-10-31), 10-K (reporting date: 2015-10-31), 10-K (reporting date: 2014-10-31), 10-K (reporting date: 2013-10-31).

¹ See details »

2018 Calculations

² Interest expense on borrowings, after tax = Interest expense on borrowings × (1 – EITR)
= 312 × (1 – 23.30%)
= 239

³ EBIT(1 – EITR) = Net earnings – Net loss from discontinued operations + Interest expense on borrowings, after tax
= 5,327 – 0 + 239
= 5,566

⁴ RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [5,566 – 1,138] ÷ 5,566
= 0.80

⁵ ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 5,566 ÷ 5,348
= 104.08%

⁶ g = RR × ROIC
= 0.70 × 49.23%
= 34.27%

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

g = 100 × (Total capital, fair value₀ × WACC – FCFF₀) ÷ (Total capital, fair value₀ + FCFF₀)
= 100 × (32,808 × 17.45% – 4,148) ÷ (32,808 + 4,148)
= 4.26%

where:

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

FCFF growth rate (g) forecast

HP Inc., H-model

Year	Value	g_t
1	g₁	34.27%
2	g₂	26.77%
3	g₃	19.27%
4	g₄	11.77%
5 and thereafter	g₅	4.26%

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 + (g₅ – g₁) × (2 – 1) ÷ (5 – 1)
= 34.27% + (4.26% – 34.27%) × (2 – 1) ÷ (5 – 1)
= 26.77%

g₃ = g₁ + (g₅ – g₁) × (3 – 1) ÷ (5 – 1)
= 34.27% + (4.26% – 34.27%) × (3 – 1) ÷ (5 – 1)
= 19.27%

g₄ = g₁ + (g₅ – g₁) × (4 – 1) ÷ (5 – 1)
= 34.27% + (4.26% – 34.27%) × (4 – 1) ÷ (5 – 1)
= 11.77%

HP Inc. (NYSE:HPQ)

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

Intrinsic Stock Value (Valuation Summary)

Weighted Average Cost of Capital (WACC)

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

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

FCFF growth rate (g) forecast