Homework Assignment #4 [Due on 19 March 2021]

Please download the 10-K filing of CISCO SYSTEMS for the year ended July 30 2016 from
SEC EDGAR, and use the following assumptions for the required work below:
Statutory tax rate 37%
Sales growth 2017 1%
Sales growth 2018-2020 2%
Terminal growth 1%
Net operating profit margin 2016 rate rounded to three decimal places
Net operating asset turnover 2016 rate rounded to three decimal places
WACC 10%
Note: if the non-operating obligation (NNO) is negative, it means the company has net non-operating
investments.
(a) Estimate the value of a share of Cisco common stock (common shares outstanding is 5,029
million) using the discounted cash flow (DCF model). (Please use the parsimonious forecast
method in our class excel example)
(b) Estimate the value of a share of the company using the ROPI model.
(c) Cisco stock closed at $31.47 on September 8 2016, which is the 10K-filing date. How does your
valuation estimate compare with this closing price? What do you believe are some reasons for the
difference? What investment decision is suggested from your results?
(Your calculation spread sheets need to be included when you submit your work).
($ millions)

NOA = ($121,652 – $7,631 – $58,125) – ($58,067 – $24,483 – $4,160) = $26,472

2016 NOPAT = $12,660 – [$2,181 – (0.37× $260] = $10,575

CSCO Reported Forecast Horizon

Terminal
($millions) 2016 2017 2018 2019 2020 Period

1% 2% 2% 2% 1%
Sales growth...........
$ 49,247 49,739.47 50,734.26 51,748.95 52,783.93 53,311.77
Sales, unrounded ...
49,247 49,739 50,734 51,749 52,784 53,312
Sales, rounded .......

NOPAT1 .................. 10,575 10,694 10,908 11,126 11,349 11,462

NOA2 ...................... 26,472 26,741 27,276 27,822 28,378 28,662

1
2016 NOPM is calculated as $10,575 / $49,247 = 0.214734 or 21.5% rounded to 3 decimals. We use NOPM to determine NOPAT
as Sales (rounded) x 21.5%.

2
2016 NOAT is calculated as $49,247 / $26,472= 1.860343 or 1.860 rounded to 3 decimals.

We use NOAT to determine NOA as Sales (rounded) / 1.860.

CSCO Reported Forecast Horizon

Terminal
($millions) 2016 2017 2018 2019 2020 Period

DCF Model

$269 $535 $546 $556 $284

Increase in NOA .........................
FCFF (NOPAT - Increase in
10,425 10,373 10,580 10,793 11,178
NOA) ........................................
0.90909 0.82645 0.75131 0.68301
Discount factor [1 / (1 + rw)t ] .....
9,477 8,573 7,949 7,372
Present value of horizon FCFF ..

Cum PV of horizon FCFF ........... $33,371

Present value of terminal FCFF . 84,830

118,201
Total firm value ...........................
 (37,113)
Less (plus) NNO .........................
(1)
Less (plus) NCI...........................
$155,315
Firm equity value ........................
Shares outstanding (millions) ..... 5,029

$30.88
Stock price per share .................

CSCO Reported Forecast Horizon

Terminal
($ millions) 2016 2017 2018 2019 2020 Period

ROPI Model:
ROPI (NOPAT - [NOABeg × rw]) .. $8,047 $8,234 $8,398 $8,567 $8,624
Discount factor [1 / (1 + rw)t ] ..... 0.90909 0.82645 0.75131 0.68301
Present value of horizon ROPI... 7,315 6,805 6,310 5,851
Cum PV of horizon ROPI .......... $26,281
Present value of terminal ROPI. 65,448
NOA ........................................... 26,472
Total firm value ............................ 118,201
Less (plus) NNO .......................... (37,113)
Less (plus) NCI............................ (1)
Firm equity value ......................... $155,315
Shares outstanding (millions) ...... 5,029
Stock price per share .................. $30.88
Our stock price estimate of $30.88 is very close to the CSCO market price of $31.47 as of
September 8, 2016, indicating that we believe that the stock is appropriately valued. Stock prices
are a function of expected NOPAT and NOA, as well as the WACC discount rate. Our forecasts for
NOPM and NOAT seem to agree with other investors’ and analysts’ model assumptions.