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Hewlett Packard (HP), a U. S. firm, is considering the purchase of a German IT services firm to boost its service revenues in the Continent.

Hewlett Packard (HP), a U. S. firm, is considering the purchase of a German IT services firm to boost its service revenues in the Continent. The purchase price is expected to be EUR 1.7 billion. A six- year horizon analysis indicates that stand- alone annual after- tax cash flows of EUR 0.25 billion are subject to synergies of 20 percent, and the after- tax terminal value of EUR 1.4 billion is subject to a synergy of 15 percent. The WACC of the U. S. firm is 9 percent. EURUSD equals 1.10. Assume that interest rates in EUR and USD are 3 percent and 2 percent, respectively (annual compounding).

What is the value of the German firm to HP?

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