Question

SALES - 49247; NOPAT - 10382.8 ; NOA- 26472

BALANCE SHEET - NCI = (1)

If Cisco’s top management were optimistic about CISCO’s market growth opportunities and revised their sales growth rates up by 2%, please forecast Cisco's sales, NOPAT, and NOA for years 2017 through 2020 and the terminal period using the following assumptions:

Sales growth (2017) - 4% Sales growth (2018-2020) -5% 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

Estimate the value of a share of Cisco common stock as of July 30, 2016 using the discounted cash flow (DCF) model and the sales forecast in (g); Note, we still assume a discount rate (WACC) of 10%, common shares outstanding of 5,029 million, and net nonoperating obligations (NNO) of $(37,113) million.

Answer 1

NOPAT Margin in 2016 = NOPAT / Sales =  10,382.80 /  49,247.00 = 0.211

Net operating asset turnover 2016 rate = Sales / NOA = 49,247 / 26,472 = 1.860

We will use these two ratios to calculate the NOPAT and NOA in future years, based on the forecast sales.

Please see the table below. All financials are in $ million except the value of a share. Number of shares outstanding is in million. Please see the second column to understand the mathematics. The cells colored in yellow contain your answer.

n			1	2	3	4	5
Year		2016	2017	2018	2019	2020	2021
y - o - y growth rate in sales	g		4%	5%	5%	5%	1%
NOPAT Margin	A	0.211	0.211	0.211	0.211	0.211	0.211
NOA turnover	B	1.860	1.860	1.860	1.860	1.860	1.860
Sales	C	49,247.00	51,216.88	53,777.72	56,466.61	59,289.94	59,882.84
NOPAT	D = C x A	10,382.80	10,806.76	11,347.10	11,914.45	12,510.18	12,635.28
NOA	E = C / B	26,472.00	27,535.96	28,912.75	30,358.39	31,876.31	32,195.08
Increase in NOA	F = Diff of E		1,063.96	1,376.80	1,445.64	1,517.92	318.76
FCF	G = D - F		9,742.80	9,970.30	10,468.82	10,992.26	12,316.52
Discount rate	r	10%
Terminal value	H = G5 / (r - g)					136,850.18
Discount factor	I = (1 + r)^(-n)		0.9091	0.8264	0.7513	0.6830
PV of FCF	J = G x I		8,857.10	8,239.92	7,865.38	7,507.86
PV of Terminal value	K = H x I					93,470.51
Value of the operations	L = Sum of all J & K	125,940.77
net nonoperating obligations	M	-37,113.00
Value of equity	N = L + M	88,827.77
Shares outstanding	O	5,029.00
the value of a share of Cisco common stock ($)	N/O	17.66