Cisco Systems (CASE STUDY)

1.Go to CSCO, enter the symbol for Cisco (CSCO), and click “Key Statistics.”

a. Record the current price and the number of shares outstanding.

Solution:

Current Price 40.20

Number of shares 4.11B
outstanding

b .Click on “Balance Sheet” under “Financials.” Copy and paste the balance sheet data into
Excel.

Solution:

7/30/2022 7/30/2021 7/30/2020 7/30/2019

Period Ending

Assets          
Current Assets        
  Cash And Cash 19,267,000 19,267,000 19,267,000 19,267,000
Equivalents
  Net Receivables 10,527,000 10,527,000 10,527,000 10,527,000
  Inventory 2,568,000 2,568,000 2,568,000 2,568,000
  Other Current Assets 4,355,000 4,355,000 4,355,000 4,355,000
Total Current Assets 36,717,000 36,717,000 36,717,000 36,717,000
Total Non-current Assets 57,285,000 57,285,000 57,285,000 57,285,000

Total Assets 94,002,000 94,002,000 94,002,000 94,002,000

Liabilitie          
s
Total Current Liabilities 25,640,000 25,640,00 25,640,00 25,640,00
0 0 0
Total Non-current Liabilities 28,589,000 28,589,00 28,589,00 28,589,00
 0 0 0
Total Liabilities 54,229,000 54,229,00 54,229,00 54,229,00
0 0 0
Stockholders' Equity        
Total Stockholder Equity 39,773,000 39,773,00 39,773,00 39,773,00
0 0 0
           
Net Tangible Assets -1,100,000 -1,100,000 -1,100,000 -1,100,000

2.Using one-half of the most recent cash and cash equivalents reported on the balance sheet
(in thousands of dollars), compute the following:

a. The number of shares that would be repurchased given the current market price.

Solution:

Cash and cash equivalents 33,413,000

Number of shares to be 4,250,000
purchased

b. The dividend per share that could be paid given the total number of shares outstanding.

Solution:

Dividend per share 0.35

3.Go to http://finance.yahoo.com to obtain the price at which your client purchased the stock
on February 28, 2019.

a. Enter the symbol for Cisco and click “Get Quotes.”

b. Click “Historical Prices,” enter the date your client purchased the stock as the start date
and the end date, and hit “Enter.” Record the adjusted closing price.

Solution:

Adj
Open High Low Close Volume
Date Close
Feb 28,
51.55 51.96 51.35 51.77 46.20 30,708,500
2019
4.Compute the total cash that would be received by your client under the repurchase and the
dividend both before taxes and after taxes.

Solution:

Cash received 18,194,000

5.The calculation in Step 4 reflects your client’s immediate cash flow and tax liability, but it
does not consider the final payoff for the client after any shares not sold in a repurchase are
liquidated. To incorporate this feature, you first decide to see what happens if the client sells
all remaining shares of stock immediately after the dividend or the repurchase. Assume that
the stock price will fall by the amount of the dividend if a dividend is paid. What are the
client’s total after-tax cash flows (considering both the payout and the capital gain) under the
repurchase of the dividend in this case?

Solution:

Cash received 18,194,000

6.Under which program would your client be better off before taxes? Which program is better
after taxes, assuming the remaining shares are sold immediately after the dividend is paid?

Solution:

The client would be better off if s/he repurchases shares after dividend is declared because
the shares’ market value will be decreased. If the market value decreases, then the client can
procure more shares at the same price.

7.Because your client is unlikely to sell all 1 million shares today, at the time of
dividend/repurchase, you decide to consider two longer holding periods: Assume that under
both plans the client sells all remaining shares of stock 5 years later, or the client sells 10
years later. Assume that the stock will return 10% per year going forward. Also assume that
Cisco will pay no other dividends over the next 10 years.

Solution:

If Cisco is not paying any dividends but the value of the shares is increased after 10 years,
then the client will get more cash from these 1 million shares.

a. What would the stock price be after 5 years or 10 years if a dividend is paid now?

Solution:
 Adj
Open High Low Close Volume
Date Close
28-02-
38.70 40.55 38.35 39.93 36.63 80,188,000
2024

Adj
Open High Low Close Volume
Date Close
28-02-2029 55.41 56.00 54.75 55.77 54.39 23,868,700

b. What would the stock price be after 5 years or 10 years if Cisco repurchases shares now?

Solution:

Adj
Open High Low Close Volume
Date Close
28-02-
38.70 40.55 38.35 39.93 36.63 80,188,000
2024

Adj
Open High Low Close Volume
Date Close
28-02-2029 55.41 56.00 54.75 55.77 54.39 23,868,700

c. Calculate the total after-tax cash flows at both points in time (when the dividend payment
or the share repurchase takes place, and when the rest of the shares are sold) for your client if
the remaining shares are sold in 5 years under both initiatives. Compute the difference
between the cash flows under both initiatives at each point in time. Repeat assuming the
shares are sold in 10 years.

Solution:

Cash Flow after 5 2,937,286,400

year
Cash Flow after 10 1,298,218,500
year

Cash Flow after 5 year = 80,188,000 * 36.63 = 2,937,286,400

Cash Flow after 10 year = 23,868,700 * 54.39 = 1,298,218,500

8.Repeat Question 7 assuming the stock will return 20% per year going forward. What do
you notice about the difference in the cash flows under the two initiatives when the return is
20% and 10%?
Solution:

Return after 5 year 293728640

Return after 10 year 129821850

9.Calculate the NPV of the difference in the cash flows under both holding period
assumptions for a range of discount rates. Based on your answer to Question 8, what is the
correct discount rate to use? 

Solution:

Return after 5 year 293728640

Return after 10 year 129821850