Forecasting with the Parsimonious Method and Estimating Share Value Using the DCF Model

Following are income statements and balance sheets for Cisco Systems.

Note: Complete the entire question in Excel and format each answer to two decimal places. Then enter the answers into the provided spaces below with two decimal places.

Cisco Systems

Consolidated Statements of Income

Years Ended December $($$ millions$)$ July $27,2019$ July $28,2018$

Revenue

Product $$42,906$ $$40,380$

Service $14,18913,883$

Total revenue $57,09554,263$

Cost of sales

Product $16,34915,870$

Service $4,8134,727$

Total cost of sales $21,16220,597$

Gross margin $35,93333,666$

Operating expenses

Research and development $7,2356,965$

Sales and marketing $10,52810,166$

General and administrative $2,0102,358$

Amortization of purchased intangible assets $165243$

Restructuring and other charges $354394$

Total operating expenses $20,29220,126$

Operating income $15,64113,540$

Interest income $1,4391,659$

Interest expense $(945)(1,037)$

Other income $($loss$),$ net $(107)182$

Interest and other income $($loss$),$ net $387804$

Income before provision for income taxes $16,02814,344$

Provision for income taxes $3,24514,222$

Net income $$12,783$ $$122$

Cisco Systems Inc.

Consolidated Balance Sheets

In millions, except par value July $27,2019$ July $28,2018$

Assets

Current assets

Cash and cash equivalents $$12,925$ $$9,827$

Investments $23,82941,375$

Accounts receivable, net of allowance for doubtful accounts $6,0406,109$

Inventories $1,5212,031$

Financing receivables, net $5,6055,444$

Other current assets $2,6103,234$

Total current assets $52,53068,020$

Property and equipment, net $3,0683,307$

Financing receivables, net $5,4545,370$

Goodwill $36,88234,877$

Purchased intangible assets, net $2,4212,807$

Deferred tax assets $4,4723,541$

Other assets $2,7461,740$

Total assets $$107,573$ $$119,662$

Liabilities and equity

Current liabilities

Short$-$term debt $$11,210$ $$5,762$

Accounts payable $2,2652,094$

Income taxes payable $1,2641,104$

Accrued compensation $3,5433,285$

Deferred revenue $11,73512,639$

Other current liabilities $4,8664,854$

Total current liabilities $34,88329,738$

Long$-$term debt $15,92322,364$

Income taxes payable $9,8209,444$

Deferred revenue $8,5799,015$

Other long$-$term liabilities $1,4401,577$

Total liabilities $70,64572,138$

Equity:

Cisco shareholders$$ equity

Preferred stock, no par value: $5$ shares authorized; none issued and outstanding $00$

Common stock and additional paid$-$in capital, $$0\mathrm{.}001$ par value: $20,000$ shares authorized;

$4,250$ and $4,614$ shares issued and outstanding at July $27,2019,$ and July $28,2018,$ respectively $44,29247,102$

$($Accumulated deficit$)$ Retained earnings $(6,493)1,356$

Accumulated other comprehensive income $($loss$)(871)(934)$

Total Cisco shareholders' equity $36,92847,524$

Total equity $36,92847,524$

Total liabilities and equity $$107,573$ $$119,662$

Feceral and state statutory tax rate $22\%$

$($a$)$ Compute net operating assets $($NOA$)$ for $2019.$

Hint: Treat Financing receivable as operating assets.

NOA

Answer

$($b$)$ Compute net operating profit after tax $($NOPAT$)$ for $2019,$ assuming a federal and state statutory tax rate of $22\%.$ Assume that all items on the $2019$ income statement will persist.

NOPAT

Answer

$($c$)$ Use the parsimonious forecast method, as shown in Analysis Insight box on page $13-4,$ to forecast Cisco$$s sales, NOPAT, and NOA for $2020$ through $2023$ and the terminal period using the following assumptions.

Note: When completing the question in Excel, refer directly to the cells containing calculated assumptions for NOPM and NOAT, i$.$e$.,$ don't type the NOPM number when making a calculation, refer to the cell.

Assumptions

Sales growth $202020235\%$

Terminal growth $1\%$

Net operating profit margin $($NOPM$)2019$ rate

Net operating asset turnover $($NOAT$)2019$ rate

Hint: Use $2019$ NOA, not average NOA, to compute the $2019$ rate for NOAT.

CSCO Reported Forecast Horizon Terminal

$($$ millions$)20192020$ Est. $2021$ Est. $2022$ Est. $2023$ Est. Period

Sales Answer

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NOPAT $=$ Forecasted sales x NOPM assumption Answer

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NOA $=$ Forecasted sales $/$ NOAT assumption Answer

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$($d$)$ Estimate the value of a share of Cisco common stock using the discounted cash flow $($DCF$)$ model as of July $27,2019$ using the following assumptions

Assumptions

Discount rate $($WACC$)7\mathrm{.}60\%$

Common shares outstanding $5,029\mathrm{.}00$ million

Net nonoperating obligations $($NNO$)$ $$(8,747)$ million

NNO is negative, which means that Cisco has net nonoperating investments

CSCO Reported Forecast Horizon Terminal

$($$ millions$)20192020$ Est. $2021$ Est. $2022$ Est. $2023$ Est. Period

DCF Model

Increase in NOA Answer

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FCFF $($NOPAT $-$ Increase in NOA$)$ Answer

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Present value of horizon FCFF Answer

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Cum. present value of horizon