Question
Forecasting with the Parsimonious Method and Estimating Share Value Using the DCF Model Following are income statements and balance sheets for Cisco Systems. Cisco Systems
Forecasting with the Parsimonious Method and Estimating Share Value Using the DCF Model
Following are income statements and balance sheets for Cisco Systems.
Cisco Systems Consolidated Statements of Income | |||
---|---|---|---|
Years Ended December ($ millions) | July 27, 2019 | July 28, 2018 | |
Revenue | |||
Product | $39,005 | $36,709 | |
Service | 12,899 | 12,621 | |
Total revenue | 51,904 | 49,330 | |
Cost of sales | |||
Product | 14,863 | 14,427 | |
Service | 4,375 | 4,297 | |
Total cost of sales | 19,238 | 18,724 | |
Gross margin | 32,666 | 30,606 | |
Operating expenses | |||
Research and development | 6,577 | 6,332 | |
Sales and marketing | 9,571 | 9,242 | |
General and administrative | 1,827 | 2,144 | |
Amortization of purchased intangible assets | 150 | 221 | |
Restructuring and other charges | 322 | 358 | |
Total operating expenses | 18,447 | 18,297 | |
Operating income | 14,219 | 12,309 | |
Interest income | 1,308 | 1,508 | |
Interest expense | (859) | (943) | |
Other income (loss), net | (97) | 165 | |
Interest and other income (loss), net | 352 | 730 | |
Income before provision for income taxes | 14,571 | 13,039 | |
Provision for income taxes | 2,950 | 12,929 | |
Net income | $11,621 | $110 |
Cisco Systems Inc. Consolidated Balance Sheets | ||
---|---|---|
In millions, except par value | July 27, 2019 | July 28, 2018 |
Assets | ||
Current assets | ||
Cash and cash equivalents | $11,750 | $8,934 |
Investments | 21,663 | 37,614 |
Accounts receivable, net of allowance for doubtful accounts | 5,491 | 5,554 |
Inventories | 1,383 | 1,846 |
Financing receivables, net | 5,095 | 4,949 |
Other current assets | 2,373 | 2,940 |
Total current assets | 47,755 | 61,837 |
Property and equipment, net | 2,789 | 3,006 |
Financing receivables, net | 4,958 | 4,882 |
Goodwill | 33,529 | 31,706 |
Purchased intangible assets, net | 2,201 | 2,552 |
Deferred tax assets | 4,065 | 3,219 |
Other assets | 2,496 | 1,582 |
Total assets | $97,793 | $108,784 |
Liabilities and equity | ||
Current liabilities | ||
Short-term debt | $10,191 | $5,238 |
Accounts payable | 2,059 | 1,904 |
Income taxes payable | 1,149 | 1,004 |
Accrued compensation | 3,221 | 2,986 |
Deferred revenue | 10,668 | 11,490 |
Other current liabilities | 4,424 | 4,413 |
Total current liabilities | 31,712 | 27,035 |
Long-term debt | 14,475 | 20,331 |
Income taxes payable | 8,927 | 8,585 |
Deferred revenue | 7,799 | 8,195 |
Other long-term liabilities | 1,309 | 1,434 |
Total liabilities | 64,222 | 65,580 |
Equity: | ||
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; | ||
4,250 and 4,614 shares issued and outstanding at July 27, 2019, and July 28, 2018, respectively | 40,266 | 42,820 |
(Accumulated deficit) Retained earnings | (5,903) | 1,233 |
Accumulated other comprehensive income (loss) | (792) | (849) |
Total Cisco shareholders' equity | 33,571 | 43,204 |
Total equity | 33,571 | 43,204 |
Total liabilities and equity | $97,793 | $108,784 |
(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.(Round your answer to the nearest whole number.) 2019 NOPAT = $Answer
(c) Use the parsimonious forecast method, as shown in Analysis Insight box on page 13-4, to forecast Ciscos sales, NOPAT, and NOA for 2020 through 2023 and the terminal period using the following assumptions.
Sales growth 20202023 | 5% |
Terminal growth | 1% |
Net operating profit margin | 2019 rate rounded to three decimal places |
Net operating asset turnover | 2019 rate rounded to three decimal places |
CSCO | Reported | Forecast Horizon | Terminal | |||
---|---|---|---|---|---|---|
($ millions) | 2019 | 2020 Est. | 2021 Est. | 2022 Est. | 2023 Est. | Period |
Sales (rounded two decimal places) | Answer
| Answer
| Answer
| Answer
| Answer
| Answer
|
Sales (rounded nearest whole number) | Answer
| Answer
| Answer
| Answer
| Answer
| Answer
|
NOPAT (rounded nearest whole number)* | Answer
| Answer
| Answer
| Answer
| Answer
| Answer
|
NOA (rounded nearest whole number)* | Answer
| Answer
| Answer
| Answer
| Answer
| Answer
|
* Use sales rounded to nearest whole number for this calculation.
(d) Estimate the value of a share of Cisco common stock using the discounted cash flow (DCF) model as of July 27, 2019; assume a discount rate (WACC) of 7.6%, common shares outstanding of 5,029 million, and net nonoperating obligations (NNO) of $(8,747) million (NNO is negative, which means that Cisco has net nonoperating investments)
Instructions:
-
Use your rounded answers for subsequent calculations.
-
Round all answers to the nearest whole number, except for discount factors and stock price per share.
- Round discount factors to 5 decimal places.
- Round stock price per share to two decimal places.
- Use a negative sign with your NNO answer.
CSCO | Reported | Forecast Horizon | Terminal | |||
---|---|---|---|---|---|---|
($ millions) | 2019 | 2020 Est. | 2021 Est. | 2022 Est. | 2023 Est. | Period |
DCF Model | ||||||
Increase in NOA | Answer
| Answer
| Answer
| Answer
| Answer
| |
FCFF (NOPAT - Increase in NOA) | Answer
| Answer
| Answer
| Answer
| Answer
| |
Discount factor | Answer
| Answer
| Answer
| Answer
| ||
Present value of horizon FCFF | Answer
| Answer
| Answer
| Answer
| ||
Cumulative present value of horizon FCFF | Answer
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Present value of terminal FCFF | Answer
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Total firm value | Answer
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NNO | Answer
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Firm equity value | Answer
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Shares outstanding (millions) | Answer
| |||||
Stock price per share | Answer
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(e) Cisco stock closed at $48.42 on September 5, 2019, 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? (Select all that apply)
Answer
Our stock price estimate is lower than the CSCO market price as of September 5, 2019, indicating that we believe the stock is overvalued.
Answer
Stock prices are a function of expected NOPAT and NOA, as well as the WACC discount rate.
Answer
Our lower stock price estimate may be due to more pessimistic forecasts or a higher discount rate compared to other investors' and analysts model assumptions.
Answer
Our higher stock price estimate may be due to more optimistic forecasts or a lower discount rate compared to other investors' and analysts model assumptions.
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