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 $12,89912,621$

Total revenue $51,90449,330$

Cost of sales

Product $14,86314,427$

Service $4,3754,297$

Total cost of sales $19,23818,724$

Gross margin $32,66630,606$

Operating expenses

Research and development $6,5776,332$

Sales and marketing $9,5719,242$

General and administrative $1,8272,144$

Amortization of purchased intangible assets $150221$

Restructuring and other charges $322358$

Total operating expenses $18,44718,297$

Operating income $14,21912,309$

Interest income $1,3081,508$

Interest expense $(859)(943)$

Other income $($loss$),$ net $(97)165$

Interest and other income $($loss$),$ net $352730$

Income before provision for income taxes $14,57113,039$

Provision for income taxes $2,95012,929$

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 $21,66337,614$

Accounts receivable, net of allowance for doubtful accounts $5,4915,554$

Inventories $1,3831,846$

Financing receivables, net $5,0954,949$

Other current assets $2,3732,940$

Total current assets $47,75561,837$

Property and equipment, net $2,7893,006$

Financing receivables, net $4,9584,882$

Goodwill $33,52931,706$

Purchased intangible assets, net $2,2012,552$

Deferred tax assets $4,0653,219$

Other assets $2,4961,582$

Total assets $$97,793$ $$108,784$

Liabilities and equity

Current liabilities

Short$-$term debt $$10,191$ $$5,238$

Accounts payable $2,0591,904$

Income taxes payable $1,1491,004$

Accrued compensation $3,2212,986$

Deferred revenue $10,66811,490$

Other current liabilities $4,4244,413$

Total current liabilities $31,71227,035$

Long$-$term debt $14,47520,331$

Income taxes payable $8,9278,585$

Deferred revenue $7,7998,195$

Other long$-$term liabilities $1,3091,434$

Total liabilities $64,22265,580$

Equity:

Cisco shareholders$$ equity

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

Common stock and additional paid$-$in capital, $$0\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 $40,26642,820$

$($Accumulated deficit$)$ Retained earnings $(5,903)1,233$

Accumulated other comprehensive income $($loss$)(792)(849)$

Total Cisco shareholders' equity $33,57143,204$

Total equity $33,57143,204$

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

$19,729$

$($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

$11,090\mathrm{.}82$

$($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.

Sales growth $202020235\%$

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

Sales $($rounded two decimal places$)$ Answer

$51,904$

Answer

$54,499\mathrm{.}2$

Answer

$57,224\mathrm{.}16$

Answer

$60,085\mathrm{.}37$

Answer

$63,089\mathrm{.}64$

Answer

$63,720\mathrm{.}53$

Sales $($rounded nearest whole number$)$ Answer

$51,904$

Answer

$54,499$

Answer

$57,224$

Answer

$60,085$

Answer

$63,090$

Answer

$63,721$

NOPAT $($rounded nearest whole number$)*$ Answer

$11,346$

Answer

$11,935$

Answer

$12,532$

Answer

$13,159$

Answer

$13,817$

Answer

$13,955$

NOA $($rounded nearest whole number$)*$ Answer

$24,824$

Answer

$26,064$

Answer

$27,367$

Answer

$28,735$

Answer

$30,172$

Answer

$30,474$

$*$ 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 $7\mathrm{.}6\%,$ 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