Cisco Systems Consolidated Statements of Income July 27, 2019 July 28, 2018 Years Ended December ($ millions) Revenue Product Service Total revenue Cost of sales Product Service Total cost of sales Gross margin Operating expenses $39,005 $36,709 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 Cisco Systems Inc. Consolidated Balance Sheets In millions, except par value July 27, 2019 July 28, 2018 Assets Current assets Cash and cash equivalents Investments Accounts receivable, net of allowance for doubtful accounts 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 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 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 $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 $10,191 $5,238 2,059 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 -- 40,266 42,820 (5,903) 1,233 (792) (849) 33,571 43,204 33,571 43,204 $97,793 $108,784 (a) Compute net operating assets (NOA) for 2019. Hint: Treat Financing receivable as operating assets. NOA = $ 14,633 (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 = $ 11,091 (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 2020-2023 Terminal growth 5% 1% Net operating profit margin 2019 rate rounded to three decimal places Net operating asset turnover 2019 rate rounded to three decimal places CSCO ($ millions) Reported 2019 Forecast Horizon 2020 Est. 2021 Est. 2022 Est. 2023 Est. Terminal Period Sales (rounded two decimal places) S 51,904 $ 54,499.2 $ 57,224.16 $ 60,085.375 Sales (rounded nearest whole number) 51,904 NOPAT (rounded nearest whole number)* NOA (rounded nearest whole number)* 11,346 24,824 54,499 v 11,935 57,224 26,064 12,532 27,367 60,085 13,159 28,735 63,089.64 $ 63,090 13,817 30,172 63,720.53 63,721 13,955 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 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 $(8,747) million (NNO is negative, which means that Cisco has net nonoperating investments). Instructions: Use your rounded answers for subsequent calculations. Round all answers to the nearest whole number, except for discount factors and stock price per share. Round discount factors to 5 decimal places. Round stock price per share to two decimal places. Use a negative sign with your NNO answer. CSCO ($ millions) ROPI Model Reported 2019 2019 Est. Forecast Horizon 2021 Est. 2022 Est. 2023 Est. Terminal Period ROPI [NOPAT-(NOA beg x WACC)] Discount factor Present value of horizon ROPI 0 * 0.92937 9,939.591 x 10,551 0.86372 9,311 x 11,079 0.80272 0 0 x 0.74602 0 x 0 x Cum present value of horizon ROPI $ 36,022 Present value of terminal ROPI $ 131,819 NOA 24,824 v Total firm value NNO 192,665 (8,747) Firm equity value $ 201,412 Shares outstanding (millions) 5,029 $ 40.05 Stock value per share (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? (Select all that apply) yes Our stock price estimate is lower than the CSCO market price as of September 5, 2019, indicating that we believe the stock is overvalued. yes Stock prices are a function of expected NOPAT and NOA, as well as the WACC discount rate. yes= no Our lower stock price estimate may be due to more pessimistic forecasts or a higher discount rate compared to other investors' and analysts model assumptions. Our higher stock price estimate may be due to more optimistic forecasts or a lower discount rate compared to other investors' and analysts model assumptions.