Question
Forecasting with the Parsimonious Method and Estimating Share Value Using the DCF Model Following are the income statement and balance sheet for Cisco Sytems for
Forecasting with the Parsimonious Method and Estimating Share Value Using the DCF Model Following are the income statement and balance sheet for Cisco Sytems for the year ended July 30, 2016.
Cisco Sytems 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 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 Sytems 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 | 4,272 | 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 |
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 |
(a) Compute net operating assets (NOA) for 2016. NOA = $Answer (b) Compute net operating profit after tax (NOPAT) for 2016, assuming a federal and state legal tax rate of 37%.(Round your answer to the nearest whole number.) 2016 NOPAT = $Answer (c) Forecast Cisco's sales, NOPAT, and NOA for years 2017 through 2020 and the terminal period using the following assumptions:
Sales growth 2017 | 1% |
Sales growth 2018-2020 | 2% |
Terminal growth | 1% |
Net operating profit margin | 21.5% |
Net operating asset turnover | 1.86 |
CSCO | Reported | Forecast Horizon | Terminal | |||
---|---|---|---|---|---|---|
($ millions) | 2016 | 2017 Est. | 2018 Est. | 2019 Est. | 2020 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 30, 2016; assume a discount rate (WACC) of 10%, common shares outstanding of 5,029 million, and net nonoperating obligations (NNO) of $(37,113) million (NNO is negative which means that Cisco has net nonoperating investments).
Use your rounded answers for subsequent calculations.
Do not use negative signs with any of your answers below.
CSCO | Reported | Forecast Horizon | Terminal | |||
---|---|---|---|---|---|---|
($ millions) | 2016 | 2017 Est. | 2018 Est. | 2019 Est. | 2020 Est. | Period |
DCF Model | ||||||
Increase in NOA | $Answer | $Answer | $Answer | $Answer | $Answer | |
FCFF (NOPAT - Increase in NOA) | Answer | Answer | Answer | Answer | Answer | |
Discount factor | (rounded 5 decimal places) | Answer | Answer | Answer | Answer | |
Present value of horizon FCFF | (rounded to nearest whole number) | Answer | Answer | Answer | Answer | |
Cum. present value of horizon FCFF | $Answer | (rounded to nearest whole number) | ||||
Present value of terminal FCFF | Answer | (rounded to nearest whole number) | ||||
Total firm value | Answer | (rounded to nearest whole number) | ||||
NNO | Answer | |||||
NCI | Answer | |||||
Firm equity value | $Answer | (rounded to nearest whole number) | ||||
Shares outstanding (millions) | Answer | (rounded to nearest whole number) | ||||
Stock price per share | $Answer | (rounded to two decimal places) |
(e) Cisco stock closed at $31.47 on Septemeber 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? (Select all that apply) Answeryesno Our stock price estimate is higher than the CSCO market price as of September 8, 2016, indicating that we believe the stock is undervalued. Answeryesno Stock prices are a function of expected NOPAT and NOA, as well as the WACC discount rate. Answeryesno Our stock price estimate is very close to the CSCO market price as of September 8, 2016, indicating we believe that the stock is appropriately priced. Answeryesno Our lower 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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