Hewlett-Packard Capital

Structure
Case Study

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 Financial Statement

• Simplified financial statement as

of 3Q2008
• Enterprise value of $109B (Debt
+ Market Equity) is used
•AA Credit rating calculated,
which is consistent with HP’s
S&P rating

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 Capital Structure Curve
111,000
110,000
109,000
108,000
107,000
Value

106,000
105,000
104,000
103,000
102,000
101,000
100,000
0.0 0.2 0.4 0.6

Model output shows the company’s “value” curve based on financial

statement shown in previous page. This is the inverse of the WACC curve.
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In the News

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 Model Output – Scenario 1
Consider $8B equity buyback is
financed by $8B debt issue
110,000
Table III
109,000
108,000
Additional equity -8,000 107,000
Additonal debt 8,000
106,000
Total additional assets 0
105,000
% Impact on EBIT -1%
104,000
103,000
Implied rating A+ 102,000
101,000
100,000
0.0 0.2 0.4 0.6

The model shows that this scenario of $8B debt-financed equity buyback will push the
capital structure to the optimal, giving HP a new rating of A+ (red point in graph).
Will HP be happy with this? Very likely!
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 Model Output – Scenario 2
How about $8B equity buyback, all
financed by cash/asset sales?
102,000
Table III
101,800
101,600
Additional equity -8,000 101,400
Additonal debt 0
101,200
Total additional assets -8,000
101,000
% Impact on EBIT -7%
100,800
100,600
Implied rating AA 100,400
100,200
100,000
0.0 0.1 0.2 0.3 0.4

The model shows that this scenario will maintain both the underleveraged standing of
the company, as well as its original credit rating of AA. Therefore, not much has
changed in relation to the original capital structure.
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 Model Output – Scenario 3
Now consider $8B debt issue to finance $8B in
new assets
118,000
Table III
117,000
Additional equity 0
Additonal debt 8,000 116,000
Total additional assets 8,000
115,000
% Impact on EBIT 7%
114,000
Implied rating A+
113,000

112,000
0.0 0.1 0.2 0.3 0.4

This scenario will again push the capital structure to the optimal, similar to Scenario 1
(red point in graph). The rating of A+ will also stay the same. Therefore HP may want
to consider purchasing new assets rather than equity buyback, assuming the right assets
are available.
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 References

MS Excel Model for Hewlett-Packard Case Study:

http://rdcohen.50megs.com/Case_Studies/Hewlett_Packard.xls

Methodology:
http://rdcohen.50megs.com/OCSabstract.htm

Other material at:

http://rdcohen.50megs.com/capstruct.htm

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