P14-26. Forecasting with Parsimonious Method and Estimating Share Value Using the ROPI Model Following are income...
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P14-26. Forecasting with Parsimonious Method and Estimating Share Value Using the ROPI Model Following are income statements and balance sheets for Cisco Systems. CISCO SYSTEMS Consolidated Statements of Operations Year Ended ($ millions) July 27, 2019 July 28, 2018 Revenue Product $39,005 $36,709 Service Total revenue Cost of sales Product Service Total cost of sales. Gross margin Operating expenses 12,899 12,621 51,904 49,330 14,863 14,427 4,375 4,297 19,238 18,724 32,666 30,606 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 continued from previous page $ millions, except par value Liabilities and equity Current liabilities Short-term debt. Accounts payable Income taxes payable.. Accrued compensation Deferred revenue Other current liabilities Total current liabilities. Long-term debt. . . Income taxes payable. Deferred revenue Other long-term liabilities Total liabilities. Equity: Cisco shareholders' equity July 27, 2019 July 28, 2018 $10,191 2,059 $ 5,238 1,904 1,149 1,004 3,221 2,986 10,668 11,490 4,424 4,413 31,712 27,035 14,475 20,331 8,927 8,585 7,799 8,195 1,309 1,434 64,222 65,580 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 (Accumulated deficit) Retained earnings Accumulated other comprehensive income (loss) Total Cisco shareholders' equity. Total equity. Total liabilities and equity 40,266 42,820 (5,903) 1,233 (792) (849) 33,571 43,204 33,571 43,204 $97,793 $108,784 $ millions, except par value Assets Current assets Cash and cash equivalents. . CISCO SYSTEMS INC. Consolidated Balance Sheets Investments. . . Accounts receivable, net of allowance for doubtful accounts of $136 at July 27, 2019 and $129 at July 28, 2018. Inventories Financing receivables, net Other current assets. Total current assets. Property and equipment, net Financing receivables, net. Goodwill Purchased intangible assets, net Deferred tax assets Other assets. Total assets. . July 27, 2019 July 28, 2018 $11,750 $ 8,934 21,663 37,614 5,491 5,554 1,383 1,846 5,095 4,949 2,373 2,940 47,755 61,837 2,789 3,006 4,958 4,882 33,529 31,706 2,201 2,552 4,065 3,219 2,496 1,582 $97,793 $108,784 continued Required a. Compute net operating assets (NOA) for 2019. 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. c. Use the parsimonious forecast method, as shown in the Analysis Insight box on page 14-5 and in Exhibit 14.2, to forecast Cisco's sales, NOPAT, and NOA for 2020 through 2023 and the terminal period using the following assumptions. Sales growth 2020-2023 Terminal growth. Net operating profit margin.. Net operating asset turnover 5% 1% 2019 rate rounded to three decimal places 2019 rate rounded to three decimal places d. Estimate the value of a share of Cisco common stock using the residual operating income (ROPI) 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). e. Cisco stock closed at $48.42 on September 5, 2019, the date the Form 10-K was filed with the SEC. How does your valuation estimate compare with this closing price? What do you believe are some reasons for the difference? What investment decision is suggested from your results? P14-26. Forecasting with Parsimonious Method and Estimating Share Value Using the ROPI Model Following are income statements and balance sheets for Cisco Systems. CISCO SYSTEMS Consolidated Statements of Operations Year Ended ($ millions) July 27, 2019 July 28, 2018 Revenue Product $39,005 $36,709 Service Total revenue Cost of sales Product Service Total cost of sales. Gross margin Operating expenses 12,899 12,621 51,904 49,330 14,863 14,427 4,375 4,297 19,238 18,724 32,666 30,606 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 continued from previous page $ millions, except par value Liabilities and equity Current liabilities Short-term debt. Accounts payable Income taxes payable.. Accrued compensation Deferred revenue Other current liabilities Total current liabilities. Long-term debt. . . Income taxes payable. Deferred revenue Other long-term liabilities Total liabilities. Equity: Cisco shareholders' equity July 27, 2019 July 28, 2018 $10,191 2,059 $ 5,238 1,904 1,149 1,004 3,221 2,986 10,668 11,490 4,424 4,413 31,712 27,035 14,475 20,331 8,927 8,585 7,799 8,195 1,309 1,434 64,222 65,580 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 (Accumulated deficit) Retained earnings Accumulated other comprehensive income (loss) Total Cisco shareholders' equity. Total equity. Total liabilities and equity 40,266 42,820 (5,903) 1,233 (792) (849) 33,571 43,204 33,571 43,204 $97,793 $108,784 $ millions, except par value Assets Current assets Cash and cash equivalents. . CISCO SYSTEMS INC. Consolidated Balance Sheets Investments. . . Accounts receivable, net of allowance for doubtful accounts of $136 at July 27, 2019 and $129 at July 28, 2018. Inventories Financing receivables, net Other current assets. Total current assets. Property and equipment, net Financing receivables, net. Goodwill Purchased intangible assets, net Deferred tax assets Other assets. Total assets. . July 27, 2019 July 28, 2018 $11,750 $ 8,934 21,663 37,614 5,491 5,554 1,383 1,846 5,095 4,949 2,373 2,940 47,755 61,837 2,789 3,006 4,958 4,882 33,529 31,706 2,201 2,552 4,065 3,219 2,496 1,582 $97,793 $108,784 continued Required a. Compute net operating assets (NOA) for 2019. 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. c. Use the parsimonious forecast method, as shown in the Analysis Insight box on page 14-5 and in Exhibit 14.2, to forecast Cisco's sales, NOPAT, and NOA for 2020 through 2023 and the terminal period using the following assumptions. Sales growth 2020-2023 Terminal growth. Net operating profit margin.. Net operating asset turnover 5% 1% 2019 rate rounded to three decimal places 2019 rate rounded to three decimal places d. Estimate the value of a share of Cisco common stock using the residual operating income (ROPI) 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). 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?
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Lets go through the problem step by step a Compute Net Operating Assets NOA for 2019 Net Operating Assets NOA is calculated as NOA Operating Assets Operating Liabilities Here Operating Assets include ... View the full answer
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