correctly. thank you Cisco Systems, Inc. is a multinational information technology company headquartered in San Jose, California, that produces and sells networking hardware, telecommunications equipment and other high-technology services. Cisco Systems was founded in December 1984 by Leonard Bosack and Sandy Lerner, two Stanford University computer scientists, who pioneered the concept of a local area network (LAN). In 1990, Cisco Systems went public with a market capitalization of $224 million. By 2000, Cisco had become the most valuable company in the world with a more than $500 billion market capitalization. The stock was initially listed on the NASDAQ in 1990, and then was added to the Dow Jones Industrial Average on June 8, 2009. Cisco is currently included in the S&P 500 Index, the Russell 1000 Index, NASDAQ- 100 Index and the Russell 1000 Growth Stock Index. 1 As Figure 1 shows, the stock price of Cisco Systems peaked in 1999-2000 before the burst of internet bubble. However, its stock price has been fluctuating in the range of $10-$30 since 2001. Stock Price of Cisco Systems Inc. 2 Following are the income statement and balance sheet for Cisco Systems for the year ended July 30, 2016. Cisco Systems Inc. Consolidated Statements of Income Years Ended December ($ 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 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 4,272 4,491 Other current assets 1,627 1,490 Total current assets 78,719 73,368 Property and equipment, net 3,506 3,332 Financing receivables, net 4,158 3,858 Goodwill 26,625 24,469 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 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 4 Cisco Systems Inc. Consolidated Balance Sheets In millions, except par value July 30, 2016 July 25, 2015 Cisco shareholders' equity Preferred stock, no par value: 5 shaes 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 44,516 43,592 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 (d) Compute net operating profit after tax (NOPAT) for 2016, assuming a federal and state statutory tax rate of 37%. (Round your answer to the nearest whole number.) (e) Forecast Cisco's sales, NOPAT, and NOA for years 2017 through 2020 and the terminal period using the following assumptions: Sales growth 2017 Sales growth 2018-2020 2% Terminal growth 1% Net operating profit margin Net operating asset turnover 2016 rate rounded to three decimal places 2016 rate rounded to three decimal places Assume a discount rate (WACC) of 10%, common shares outstanding of 5,029 million, and net nonoperating obligations (NNO) of S(37,113) million (NNO is negative which means that Cisco has net nonoperating investments). (f) Estimate the value of a share of Cisco common stock using the discounted cash flow (DCF) model as of July 30, 2016; (g) Cisco stock closed at $31.47 on September 8, 2016, the date the Form 10-K was filed with the SEC. How does your DCF valuation estimates compare with this closing price? What do you believe are some reasons for the difference? What investment decision is suggested from your results? (h) Are there other equity valuation models? Please discuss the advantages and disadvantages of different equity valuation models. (i) Cisco stock closed at $31.47 on September 8, 2016, the date the Form 10-K was filed with the SEC. How does your DCF valuation estimates compare with this closing price? What do you believe are some reasons for the difference? What investment decision is suggested from your results? (10 points) (i) Are there other equity valuation models? Please discuss the advantages and disadvantages of different equity valuation models. (15 points) Appendix 12B: Parsimonious Method for Forecasting NOPAT and NOA This appendix explains a parsimonious method to obtain forecast for net operating profit after tax (NOPAT) and for net operating assets (NOA). This method requires three crucial inputs: 1. Sales growth. 2. Net operating profit margin (NOPM); Defined in Module 4 as NOPAT divide by sales. 3. Net operating asset turnover (NOAT); defined in Module 4 as sales divide by average NOA. (For forecasting purposes, we define NOAT as sales divide by year-end NOA instead of average NOA because we want to forecast year-end values.) Multiyear Forecasting with Parsimonious Method We use Procter & Gamble's 2016 income statement from Exhibit 12.2, and its 2016 balance sheet form Exhibit 12.3, to determine the following measures. We assume that P&G's statutory tax rate is 37% on nonoperating revenues and expenses. S millions Sales Net operating profit after tax ($13,441-[$3342+ ($579-$182-$325) 37%]) NOA ($127,136-$7,102-$6,246-$7,185-$9,325-$7,449-$9,113-1 $10,325) NOPM ($10,072/$65,299) NOAT ($65.299/$70,391) 2016 $65,299 $10,072 $70,391 15.4% 0.93 0123 *we use ending balance sheet amounts, rather than average amounts, because we forecast ending balance ending balance sheet amounts. Each year's forecasted sales is the prior year sales multiplied successively by (1+ growth rate) and then rounded to whole digits. Consistent with our prior revenue growth rate assumption for P&G, we define "1+ growth rate" as 1.01 for 2017 and 1.02 for 2018 onward. NOPAT is computed using forecasted (and rounded) sales each year times the 2016 NOPM of 15.4%; and NOA is computed using forecasted (and rounded) sales divided by the 2016 NOAT of 0.93. Forecasted numbers for 2017 through 2020 are in Exhibit 12B.1; supporting computations are in parentheses. This forecasting process can be continued for any desired forecast horizon. Also, the forecast assumption such as sales growth, NOPM, and NOAT can be varied by year, if desired. This parsimonious method is simpler than the method illustrated in this method. However, its simplicity foregoes information than can improve forecast accuracy. Exhibit 12B. P&G Parsimonious Method Forecasts of Sales, NOPAT and NOA $ millions Reported 2016 Forecast 2017 Est. 2018 Est. 2019 Est. 2020 Est. Net sales growth 1.0% 2.0% 2.0% 2.0% Net sales (unrounded) $65,299 $65,951.99 $67,271.03 $68,616.45 $69,988.78 ($65,299 x 1.01) ($65.951.99x1.02) ($67,271.03 1.02) ($68.616.45 1.002) Net sales (rounded) $65,299 $65,952 $67,271 $68,616 $69,989 NOPATI $10,072 NOA $70,391 $10,157 ($65,952 0.154) $70,916 $10.360 $10,567 $10,778 (S67-271 0.154) $72,334 ($65,952/0.93) (S67-271-0.93) ($68,616 0.154) $73,781 (S68.616-0.93) ($69.989 x 0.154) $75,257 ($69.989/0.93) = Forecasted NOPAT Forecasted net sales (rounded) x 2016 NOPM Forecasted NOA Forecasted net sales (rounded) +2016 NOAT