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 Systems 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 Systems 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 shares 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. Hint: Treat Financing receivable as operating assets. NOA = $Answer
(b) 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.) 2016 NOPAT = $Answer
(c) Use the parsimonious forecast method, as shown in Analysis Insight box on page 13-4, to forecast Ciscos sales, NOPAT, and NOA for 2017 through 2020 and the terminal period using the following assumptions.
Sales growth 2017 | 1% |
Sales growth 2018-2020 | 2% |
Terminal growth | 1% |
Net operating profit margin | 21.5% |
Net operating asset turnover | 1.86 |
CSCO | Reported | Forecast Horizon | Terminal | |||
---|---|---|---|---|---|---|
($ 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 $(37,113) million (NNO is negative which means that Cisco has net nonoperating investments).
Instructions:
Use your rounded answers for subsequent calculations.
Round all answers to the nearest whole number, except for discount factors and stock price per share.
Round discount factors to 5 decimal places.
Round stock price per share to two decimal places.
Use a negative sign with your NNO answer.
CSCO | Reported | Forecast Horizon | Terminal | |||
---|---|---|---|---|---|---|
($ millions) | 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 | Answer
| Answer
| Answer
| Answer
| ||
Present value of horizon FCFF | Answer
| Answer
| Answer
| Answer
| ||
Cummulative present value of horizon FCFF | Answer
| |||||
Present value of terminal FCFF | Answer
| |||||
Total firm value | Answer
| |||||
NNO | Answer
| |||||
NCI | Answer
| |||||
Firm equity value | Answer
| |||||
Shares outstanding (millions) | Answer
| |||||
Stock price per share | Answer
|
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started