Forecasting with the Parsimonious Method and Estimating Share Value Using the DCF Model Following are the income statement and balance sheet for Cisco Systems for the year ended July 30, 2016.

CISCO SYSTEMS Consolidated Statements of Operations Year Ended ($ millions)

July 30, 2016 July 25, 2015 Revenue Product. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37,254 $37,750 Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,993 11,411 Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,247 49,161 Cost of sales Product. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,161 15,377 Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,126 4,103 Total cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,287 19,480 Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,960 29,681 Operating expenses Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,296 6,207 Sales and marketing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,619 9,821 General and administrative. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,814 2,040 Amortization of purchased intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . 303 359 Restructuring and other charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268 484 Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,300 18,911 Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,660 10,770 Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,005 769 Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (676) (566)

Other income (loss), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (69) 228 Interest and other income (loss), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260 431 Income before provision for income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 12,920 11,201 Provision for income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,181 2,220 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,739 $ 8,981 CISCO SYSTEMS INC.
Consolidated Balance Sheets In millions, except par value July 30, 2016 July 25, 2015 Assets Current assets Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,631 $ 6,877 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,125 53,539 Accounts receivable, net of allowance for doubtful accounts of $249 at July 30, 2016 and $302 at July 25, 2015. . . . . . . . . . . . . . . . . 5,847 5,344 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,217 1,627 Financing receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,2724,491 Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,627 1,490 Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,719 73,368 Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,5063,332 Financing receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,1583,858 Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,62524,469 Purchased intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,501 2,376 Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,299 4,454 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,844 1,516 Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $121,652 $113,373 Liabilities and equity Current liabilities Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,160 $ 3,897 Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,056 1,104 Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 517 62 Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,951 3,049 Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,155 9,824 Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,072 5,476 Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,911 23,412 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,483 21,457 Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 925 1,876 Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,317 5,359 Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,431 1,562 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,067 53,666 Cisco shareholders’ equity Preferred stock, no par value: 5 shares authorized; none issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ——
Common stock and additional paid-in capital, $0.001 par value:
20,000 shares authorized; 5,029 and 5,085 shares issued and outstanding at July 30, 2016 and July 25, 2015, respectively . . . . . . . 44,51643,592 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,396 16,045 Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . (326) 61 Total Cisco shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,586 59,698 Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) 9 Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,585 59,707 Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $121,652 $113,373 Required

a. Compute net operating assets (NOA) for 2016.

b. Compute net operating profit after tax (NOPAT) for 2016, assuming a federal and state statutory tax rate of 37%.

c. Use the parsimonious forecast method, as shown in the Analysis Insight box and illustrated in Exhibit 13.2, to forecast Cisco’s sales, NOPAT, and NOA for 2017 through 2020 and the terminal period using the following assumptions.

Sales growth 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1%
Sales growth 2018–2020 . . . . . . . . . . . . . . . . . . . . . . 2%
Terminal growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1%
Net operating profit margin . . . . . . . . . . . . . . . . . . . . 2016 rate rounded to three decimal places Net operating asset turnover . . . . . . . . . . . . . . . . . . . 2016 rate rounded to three decimal places

d. Estimate the value of a share of Cisco common stock using the discounted cash flow (DCF) model as of July 30, 2016; assume a discount rate (WACC) of 10%, common shares outstanding of 5,029 million, and net nonoperating obligations (NNO) of $(37,113) million (NNO is negative which means that Cisco has net nonoperating investments).

e. Cisco stock closed at $31.47 on September 8, 2016, the date the Form 10-K was filed with the SEC.
How does your valuation estimate compare with this closing price? What do you believe are some reasons for the difference? What investment decision is suggested from your results?