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Fadali, Inc.

Fadali, Inc. April 7, 2005 Computer Technology Company Stock Purchase Recommendation by Martinsburg EMBA Group 1 (Renner, Macom, Perry, Wolford & McLaughlin). Determining where to invest?. Computer technology companies Best fit for Fadali: Dell or Hewlett-Packard Our recommendation?

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Fadali, Inc.

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  1. Fadali, Inc. April 7, 2005 Computer Technology Company Stock Purchase Recommendation by Martinsburg EMBA Group 1 (Renner, Macom, Perry, Wolford & McLaughlin)

  2. Determining where to invest? • Computer technology companies • Best fit for Fadali: Dell or Hewlett-Packard • Our recommendation? Hewlett-Packard -Let’s see why.

  3. How to make the decision . . . Key ratios (Based on Jan. 2005 data)

  4. Key decision points continued…. • HP’s current ratio is higher than their industry average. • Dell’s current ratio is slightly lower than their industry average.

  5. HP - Better debt/ asset ratio HP - Better debt to equity ratio HP - Better PE ratio HP - Better cash flow per share ratio HP - Better current ratio Dell - More liquid, but has many fewer assets, liabilities and PP&E. Dell - Better long-term debt to equity ratio, but that would be expected given their comparatively low assets, liabilities and PP&E. What does this all mean?. . . HP is more financially flexible . . .

  6. Other Factors to Consider • Dell pays no dividends. • HP pays an average of 8 cents in dividends per quarter per share, and has consistently paid dividends since 1965. • If paid at the current rate of 32 cents annually per share, the HP expected dividend yield over the five-year period would be $40,000. • Additionally, Fadali would receive a 1% compound interest sum of $1,216.00 on the HP stock. • These numbers don’t account for any HP stock appreciation.

  7. PEG Ratios

  8. Target Price Analysis

  9. How both Dell & HP look 1st Q 2005 • Total assets Dell: $23.2B HP: $75.1B • Total current liabilities Dell: $14.1B HP: $27.5B • A/R turnover Dell: 12.2 HP: 7.2 • Days of sales outstanding Dell: 32.29 HP: 50.47 • Assets to OE ratio Dell: 3.58 HP: 2.0 • Debt to asset ratio Dell: .72 HP: .50 • Debt to equity ratio Dell: 2.58 HP: 1.0 • LT Debt to equity ratio Dell: .08 HP: .12 • HP has reported a recent court case with a $116M settlement

  10. HP Goodwill and Intangibles • HPJan 31, 2005 • Goodwill 15,850 (millions) • Purchased Intangible Assets = 3,939 (millions) • Total = 19,789 (millions) • Total Assets = 75,143 (millions) • Therefore intangibles/goodwill account for 26.3% of total assets • If you strip away intangible assets, total assets then becomes 55,354 • Debt = 37,417 • The new Debt/Asset ratio then becomes 0.676 • In Summary... • Total Debt/ Total Assets = 0.5 (as filed) • Total Debt/ Tangible Assets = 0.7 (intangibles stripped away)

  11. What do we Anticipate and Conclude • Dell is a slightly better bargain at its current trading price, BUT HP has liquidity for its massive size, it is more solvent and clearly more flexible than Dell. • With an anticipated five-year growth rate of 9% over the planned investment period, HP stock has an expected total yield to Fadali of approximately $44,000 with a resulting after-tax capital gain of approximately $32,500 at the end of the investment period. • An expected yield (just from dividends) over the five-year period is $40,000. • HP is clearly a better investment choice for Fadali due to its liquidity, solvency and flexibility traits.

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