1. Caterpillar Inc. reported its annual financial statements for the 2018 fiscal year (See the Excel sheet attached for Cats financials in the last 4 years). The day before the report, the firms market price per share closed at $127.07. For those who are not familiar with Caterpillar, here is a brief description of their business:

Caterpillar Inc. is an American Fortune 100 corporation which designs, develops, engineers, manufactures, markets and sells machinery, and engines to customers via a worldwide dealer network. It is the world's largest construction equipment manufacturer. Caterpillar products and components are manufactured and sold in 110 facilities worldwide. 51 plants are located in the United States and 59 overseas plants are located in Australia, Belgium, Brazil, Canada, China, Czech Republic, England, France, Germany, Hungary, India (Chennai), Indonesia, Italy, Japan, Mexico, the Netherlands, Northern Ireland, Poland, Russia, Singapore, South Africa and Sweden.

The market capitalization rate on the day before the report (Investors annual required rate of return given the firms debt/equity structure) is 32.85%, i.e. k=0.3285. Use the information provided here as well as the financial statements to answer the following questions:

1. (4) What is Caterpillars 2018 Return on Equity (ROE)? Please use the Dupont system (Show its components) and the market-to-book method.
2. (6) Find the intrinsic value per share using the Constant Dividend Discount Model. (Hint: Retained earnings for 2018 is the change in the balance of retained earnings since last year, i.e. 2018 retained earnings 2017 retained earnings). Compare it with yesterdays market price, is it time to add Caterpillar Inc. to our portfolio?
3. (3) What is the major issue in using the constant dividend discount model when measuring the fundamental value of a firm? Use this firm as an example to illustrate your point.
4. (3) In your opinion, how can Caterpillar provide growth to shareholders? And what type of macroeconomic factors/risks they are exposed to? (Think about its business line and where the growth in revenue can come from)
5. (4) Find the inventory turnover ratio and average collection period for years (2018, 2017, and 2016). Comparing the ratios over the 3 years, is the company being more or less efficient in its use of assets?

Income Statement 12/31/18 54,722,000 39,819,000 14.903,000 12/31/17 12/31/16 Revenue (All numbers in 000s) 12/31/15 5 Total Revenue 45462,000 33.638,000 18.537.000 47,011,000 35,897,000 11,114,000 Cost of Revenue 30,402,000 8,135,000 Gross Profit 11,824,000 8Operating Espenses 4,806,000 1761000 46.186,000 8336000 490,000 7846,000 1,698,000 9Selling General and Administrative 10 Depreciation 11 Total Operating Expenses: 12 Earnings Before Interest and Taxes (EBIT) 13 Interest Expense 4425,000 4.476.000 4.363.000 1823000 1775000 2092000 42.352.000 4,659,000 1,220,000 39,886,000 5,576,000 1,478,000 4,098,000 3.139.000 36.653.000 1884,000 1,751.000 Income Before Tax 133,000 3,439,000 916,000 14 15 Income Ta Expense 16 Minority Interest 17 Net Income From Continuing Ops IR Net Income 19 Shares Outvtanding 192.000 41.000 69.000 76,000 76,000 2.523.000 6,148,000 6,147,000 759,000 -59.000 754,000 588.000 67,000 2,512,000 588,000 588.000 588.000 20 21 Balance Sheet 23 Period Ending (All numbers in 000s) 24 Current Assets 12/31/18 12/31/17 12/31/16 12/31/15 7.381,000 25 Cash And Cash Equivalents 6,968.000 5257,000 5340,000 26 Shor Term Investments 27 Net Receivables 8.714.000 7376.000 5,919,000 6.677.000 9,700,000 66,000 28 Inventory 11,529,000 10.018.000 8.614.000 Other Current Assets 52.000 242,000 36,244,000 23.000 29 30 Total Curremt Assets 18.603,000 31,967,000 249,000 15.322.000 33.508.000 31 Long Term Investments 32 Property Plant and Equinment 33 Goodwill 34 Intangible Assets 246,000 16,090,000 6,598,000 2821,000 13,574,000 6217,000 1,897,000 14,155,000 6.183.000 6,003,000 2,111,000 2.349.000 35 Accumalated Amortization 36 Other Assetsa 37 Deferred Long Term Asset Charges 38 Total Assets 39 Current Liabilities 40 Accounts Pavable 41 Shor Current Long Tem Debt 3,443,000 1363,000 78.509.000 3,495.000 5.208.000 5,324,000 1.569,000 2.683.000 2.367.000 76.962.000 74.704.000 78,342,000 7,051.000 6,487,000 4,614.000 5,023.000 10,000 6,000 507.000 517,000 2955,000 26,242,000 Other Current Liabilities 3.735.000 3,657,000 26,931,000 3,377,000 26,132,000 8368,000 12,541,000 42 43 Total Current Lizbilities 28.218.000 44 Long Term Debt 45 Other Liabilities 46 Deferred Long Term Liability Charges 47 Minority Interest 48 Negative Goodwill 49 Total Liabilities 7.549.000 7,492.000 8883.000 11,211,000 12418,000 12.046.000 41,000 69.000 76,000 76,000 64.429.000 63.196.000 61,491,000 63457.000 50 Stockholders' Equity 51 Misc. Stocks Options Warrants 52 Redeemable Preferred Stock 53 Preferred Stock 54 Common Stock 5.827.000 5.593.000 5.277.000 5.238.000 30.427,000 55 Retained Earnings 56 Treasury Stock 57 Capital Surplus 26.301.000 27.377.000 29.246.000 -22.215.000 18,197,000 19,517,000 -19.675.000 58 Other Stockholder Equity -1.684,000 -1.192.000 -2.039.000 -2.035,000 14,039,000 13,697,000 59 Total Stockholder Equity 13.137.000 14 809 000 Income Statement 12/31/18 54,722,000 39,819,000 14.903,000 12/31/17 12/31/16 Revenue (All numbers in 000s) 12/31/15 5 Total Revenue 45462,000 33.638,000 18.537.000 47,011,000 35,897,000 11,114,000 Cost of Revenue 30,402,000 8,135,000 Gross Profit 11,824,000 8Operating Espenses 4,806,000 1761000 46.186,000 8336000 490,000 7846,000 1,698,000 9Selling General and Administrative 10 Depreciation 11 Total Operating Expenses: 12 Earnings Before Interest and Taxes (EBIT) 13 Interest Expense 4425,000 4.476.000 4.363.000 1823000 1775000 2092000 42.352.000 4,659,000 1,220,000 39,886,000 5,576,000 1,478,000 4,098,000 3.139.000 36.653.000 1884,000 1,751.000 Income Before Tax 133,000 3,439,000 916,000 14 15 Income Ta Expense 16 Minority Interest 17 Net Income From Continuing Ops IR Net Income 19 Shares Outvtanding 192.000 41.000 69.000 76,000 76,000 2.523.000 6,148,000 6,147,000 759,000 -59.000 754,000 588.000 67,000 2,512,000 588,000 588.000 588.000 20 21 Balance Sheet 23 Period Ending (All numbers in 000s) 24 Current Assets 12/31/18 12/31/17 12/31/16 12/31/15 7.381,000 25 Cash And Cash Equivalents 6,968.000 5257,000 5340,000 26 Shor Term Investments 27 Net Receivables 8.714.000 7376.000 5,919,000 6.677.000 9,700,000 66,000 28 Inventory 11,529,000 10.018.000 8.614.000 Other Current Assets 52.000 242,000 36,244,000 23.000 29 30 Total Curremt Assets 18.603,000 31,967,000 249,000 15.322.000 33.508.000 31 Long Term Investments 32 Property Plant and Equinment 33 Goodwill 34 Intangible Assets 246,000 16,090,000 6,598,000 2821,000 13,574,000 6217,000 1,897,000 14,155,000 6.183.000 6,003,000 2,111,000 2.349.000 35 Accumalated Amortization 36 Other Assetsa 37 Deferred Long Term Asset Charges 38 Total Assets 39 Current Liabilities 40 Accounts Pavable 41 Shor Current Long Tem Debt 3,443,000 1363,000 78.509.000 3,495.000 5.208.000 5,324,000 1.569,000 2.683.000 2.367.000 76.962.000 74.704.000 78,342,000 7,051.000 6,487,000 4,614.000 5,023.000 10,000 6,000 507.000 517,000 2955,000 26,242,000 Other Current Liabilities 3.735.000 3,657,000 26,931,000 3,377,000 26,132,000 8368,000 12,541,000 42 43 Total Current Lizbilities 28.218.000 44 Long Term Debt 45 Other Liabilities 46 Deferred Long Term Liability Charges 47 Minority Interest 48 Negative Goodwill 49 Total Liabilities 7.549.000 7,492.000 8883.000 11,211,000 12418,000 12.046.000 41,000 69.000 76,000 76,000 64.429.000 63.196.000 61,491,000 63457.000 50 Stockholders' Equity 51 Misc. Stocks Options Warrants 52 Redeemable Preferred Stock 53 Preferred Stock 54 Common Stock 5.827.000 5.593.000 5.277.000 5.238.000 30.427,000 55 Retained Earnings 56 Treasury Stock 57 Capital Surplus 26.301.000 27.377.000 29.246.000 -22.215.000 18,197,000 19,517,000 -19.675.000 58 Other Stockholder Equity -1.684,000 -1.192.000 -2.039.000 -2.035,000 14,039,000 13,697,000 59 Total Stockholder Equity 13.137.000 14 809 000