Below information extracted from Compaq Computer for dividend growth model measurement.

Partial balance sheet for Compaq Computer

Irredeemable debentures @ 6% $57 Billion

Capital Share @ $8.5 $85 Billion

The risk-free rate is 3% and the market rate at 8%, Hewlett-Packard (HP) equity beta 1.8 and the corporate tax rate at 25%

Based on Hewlett-Packard (HP) projection the merger, the annual cash flow will be increased on the next few years as below;

Year 1 Year 2 Year 3 Year 4

$4 billions $4 billions $7 billions $7.5 billions growth forever

Required:

Compute and comment on the estimate purchase value for Compaq Computer by using,

(i) Equity value. (12 marks)

(ii) Weightage average cost of capital ( WACC ). (12 marks)

(iii) Outline the THREE (3) main limitations from the above measurement. (6 marks)

(iv) Justify the impact of technology changes towards Hewlett-Packard (HP) corporation. (5 marks)