Question

Here are some accounting numbers and market values (in millions) for Hewlett-Packard and Lenovo Group for 2008. These two computer manufacturers are considered to be comparables for Dell, Inc.

	Sales	Earnings	Book Value	Market Value
Hewlett-Packard	$84,229	$7,264	$38,526	$115,700
Lenovo Group	14,590	161	1,134	6,381

Dell reported to following numbers for the fiscal year 2008:

Sales	$61,133 million
Earnings	$2,947 million
Book Value	$3,735 million
Shares Outstanding	2,060 million

1. Based on the Price to sales multiple, Dell’s valuation is:
   1. $46,654 million
   2. $48,517 million
   3. $51,469 million
   4. $55,631 million

2. Based on average of Price to sales, Price to earnings and Price to Book valuations, Dell’s estimated price per share is:

1. $23.86
2. $24.86
3. $25.86
4. $26.86

Answer 1

Price to sales multiple= market value/sales
HP=115700/84229=1.37
Lenovo=6381/14590=0.44
average of the two above=(1.37+0.4$)/2=0.91
PE ratio=0.91 and sales of dell=61133mn
so valuation of dell=0.91*61133mn=55631mn
option D

2)HP:
price to sales=1.37
price to earnings=market value/earnings=115700/7264=15.93
Price to book=market value/book value=115700/38526=3

Lenovo:
Price to sales=0.44
Price to earnings=6381/161=39.63
price to book=6381/1134=5.63

Let us find average of each above:
Price to sales=0.91 and so valuation=0.91*61133=55631mn
price to earnings=(15.93+39.63)/2=27.78 and valuation=27.78*2947=81868mn
price to book=(3+5.63)/2=4.32 and valuation=4.32*3735=16135mn
price per share=valuation/shares outstanding
=((55631+81868+16135)/3)/2060
=24.86
option B