Forecasting with the Parsimonious Method and Estimating Share Value Using the ROPI Model

Following are income statements and balance sheets for Cisco Systems.

Note: Complete the entire question in Excel and format each answer to two decimal places. Then enter the answers into the provided spaces below with two decimal places.

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	0	0
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
Federal and state statutory tax rate	22%

(a) Compute net operating assets (NOA) for 2019.

Hint: Treat Financing receivable as operating assets.

	NOA
	Answer 1

(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.

	NOPAT
	Answer 2

(c) Use the parsimonious forecast method, as shown in 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.

Note: When completing the question in Excel, refer directly to the cells containing calculated assumptions for NOPM and NOAT, i.e., don't type the NOPM number when making a calculation, refer to the cell.

Assumptions
Sales growth 2020-2023	5%
Terminal growth	1%
Net operating profit margin (NOPM)		2019 rate
Net operating asset turnover (NOAT)		2019 rate

Hint: Use 2019 NOA, not average NOA, to compute the 2019 rate for NOAT.

	CSCO	Reported	Forecast Horizon	Terminal
	($ millions)	2019	2020 Est.	2021 Est.	2022 Est.	2023 Est.	Period
	Sales	Answer 3	Answer 4	Answer 5	Answer 6	Answer 7	Answer 8
	NOPAT = Forecasted sales x NOPM assumption	Answer 9	Answer 10	Answer 11	Answer 12	Answer 13	Answer 14
	NOA = Forecasted sales / NOAT assumption	Answer 15	Answer 16	Answer 17	Answer 18	Answer 19	Answer 20

(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).

Assumptions
Discount rate (WACC)	7.60%
Common shares outstanding	5,029	million
Net nonoperating obligations (NNO)	$(8,747)	million

NNO is negative, which means that Cisco has net nonoperating investments

		Reported	Forecast Horizon	Terminal
	($ millions)	2019	2020	2021	2022	2023	Period
	ROPI (NOPAT - [NOABeg x rw])		Answer 21	Answer 22	Answer 23	Answer 24	Answer 25
	Present value of horizon ROPI		Answer 26	Answer 27	Answer 28	Answer 29
	Cum present value of horizon ROPI	Answer 30
	Present value of terminal ROPI	Answer 31
	NOA	Answer 32
	Total firm value	Answer 33
	Less NNO	Answer 34
	Firm equity value	Answer 35
	Shares outstanding (millions)	Answer 36
	Stock price per share	Answer 37

Hint: Treat Financing receivable as operating assets. NOA 24,824 (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. NOPAT 11,346 (c) Use the parsimonious forecast method, as shown in 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. Note: When completing the question in Excel, refer directly to the cells containing calculated assumptions for NOPM and NOAT, i.e., don't type the NOPM number when making a calculation, refer to the cell. Assumptions Sales growth 2020-2023 5% Terminal growth 1% Net operating profit margin (NOPM) 2019 rate Net operating asset turnover (NOAT) 2019 rate Hint: Use 2019 NOA, not average NOA, to compute the 2019 rate for NOAT. CSCO Reported Forecast Horizon Terminal ($ millions) 2019 2020 Est. 2021 Est. 2022 Est. 2023 Est. Period Sales $ 51,904 V $ 54,499.2 ~ $ 57,224.16 v $ 60,085.37 v $ 63,089.64 v $ 63,720.53 v NOPAT = Forecasted sales x NOPM assumption 11,346 11,935 x 12,532 x 13,159 x 13,817 x 13,955 x NOA = Forecasted sales / NOAT assumption 24,824 v 26,064 x 27,367 x 28,735 x 30,172 x 30,474 x (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 $(8,747) million (NNO is negative, which means that Cisco has net nonoperating investments).CSCO Reported Forecast Horizon Terminal ($ millions) 2019 2020 Est. 2021 Est. 2022 Est. 2023 Est. Period Sales $ 51,904 ~ $ 54,499.2 ~ $ 57,224.16 ~ $ 60,085.37 ~ $ 63,089.64 v $ 63,720.53 NOPAT = Forecasted sales x NOPM assumption 11,346 11,935 x 12,532 x 13,159 x 13,817 x 13,955 x NOA = Forecasted sales / NOAT assumption 24,824 V 26,064 x 27,367 x 28,735 x 30,172 x 30,474 x (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). Assumptions Discount rate (WACC) 7.60% Common shares outstanding 5,029 million Net nonoperating obligations (NNO) $(8,747) million NNO is negative, which means that Cisco has net nonoperating investments Reported Forecast Horizon Terminal ($ millions) 2019 2020 2021 2022 2023 Period ROPI (NOPAT - [NOABeg x rw]) $ 10,048 x $ 10,551 x $ 11,079 x $ 11,633 x $ 11,662 x Present value of horizon ROPI 9,338 x 9,113 x 8,893 x 8,678 x Cum present value of horizon ROPI $ 36,023 x Present value of terminal ROPI 131,819 x NOA 24,824 Total firm value 192,667 x Less NNO (8, 747) ~ Firm equity value $ 201,414 x Shares outstanding (millions) 5,029 Stock price per share $ 40.05Hint: Use ZUTy NUA, not average NUA, to compute the ZUTy rate for NUAl. Csco Reported Forecast Horizon Terminal ($ millions) 2019 2020 Est. 2021 Est. 2022 Est. 2023 Est. Period Sales $ 51,904 ~ $ 54,499.2 ~ $ 57,224.16 ~ $ 60,085.37 v $ 63,089.64 ~ $ 63,720.53 NOPAT = Forecasted sales x NOPM assumption 11,346 v 11,935 x 12,532 x 13,159 x 13,817 x 13,955 x NOA = Forecasted sales / NOAT assumption 24,824 v 26,064 x 27,367 x 28,735 x 30,172 x 30,474 x (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). Assumptions Discount rate (WACC) 7.60% Common shares outstanding 5,029 million Net nonoperating obligations (NNO) $(8,747) million NNO is negative, which means that Cisco has net nonoperating investments Reported Forecast Horizon Terminal ($ millions) 2019 2020 202 2022 2023 Period ROPI (NOPAT - [NOABeg x rw]) $ 10,048 x $ 10,551 x $ 11,079 x $ 11,633 x $ 11,662 x Present value of horizon ROPI 9,338 x 9,113 x 8,893 x 8,678 x Cum present value of horizon ROPI $ 36,022 x Present value of terminal ROPI 131,819 x NOA 24,824 v Total firm value 192,665 x Less NNO (8,747) ~ Firm equity value $ 201,412 x Shares outstanding (millions) 5,029 Stock price per share $ 40.05