Question

2. Caterpillar Inc. reported its annual financial statements for the 2018 fiscal year (See the Excel sheet attached for Cat’s financials in the last 4 years). The day before the report, the firm’s market price per share closed at $127.07. For those who are not familiar with Caterpillar, here is a brief description of their business: Caterpillar Inc. is an American Fortune 100 corporation which designs, develops, engineers, manufactures, markets and sells machinery, and engines to customers via a worldwide dealer network. It is the world's largest construction equipment manufacturer. Caterpillar products and components are manufactured and sold in 110 facilities worldwide. 51 plants are located in the United States and 59 overseas plants are located in Australia, Belgium, Brazil, Canada, China, Czech Republic, England, France, Germany, Hungary, India (Chennai), Indonesia, Italy, Japan, Mexico, the Netherlands, Northern Ireland, Poland, Russia, Singapore, South Africa and Sweden. The market capitalization rate on the day before the report (Investors’ annual required rate of return given the firm’s debt/equity structure) is 32.85%, i.e. k=0.3285. Use the information provided here as well as the financial statements to answer the following questions: a) (4) What is Caterpillar’s 2018 Return on Equity (ROE)? Please use the Dupont system (Show its components) and the market-to-book method. b) (6) Find the intrinsic value per share using the Constant Dividend Discount Model. (Hint: Retained earnings for 2018 is the change in the balance of retained earnings since last year, i.e. 2018 retained earnings – 2017 retained earnings). Compare it with yesterday’s market price, is it time to add Caterpillar Inc. to our portfolio? c) (3) What is the major issue in using the constant dividend discount model when measuring the fundamental value of a firm? Use this firm as an example to illustrate your point. d) (3) In your opinion, how can Caterpillar provide growth to shareholders? And what type of macroeconomic factors/risks they are exposed to? (Think about its business line and where the growth in revenue can come from) e) (4) Find the inventory turnover ratio and average collection period for years (2018, 2017, and 2016). Comparing the ratios over the 3 years, is the company being more or less efficient in its use of assets?

Income Statement
Revenue (All numbers in 000s)	12/31/2018	12/31/2017	12/31/2016	12/31/2015
Total Revenue	54,722,000	45,462,000	38,537,000	47,011,000
Cost of Revenue	39,819,000	33,638,000	30,402,000	35,897,000
Gross Profit	14,903,000	11,824,000	8,135,000	11,114,000
Operating Expenses:
Selling General and Administrative	4,806,000	4,425,000	4,476,000	4,363,000
Depreciation	1761000	1823000	1775000	2092000
Total Operating Expenses	46,386,000	39,886,000	36,653,000	42,352,000
Earnings Before Interest and Taxes (EBIT)	8,336,000	5,576,000	1,884,000	4,659,000
Interest Expense	490,000	1,478,000	1,751,000	1,220,000
Income Before Tax	7,846,000	4,098,000	133,000	3,439,000
Income Tax Expense	1,698,000	3,339,000	192,000	916,000
Minority Interest	41,000	69,000	76,000	76,000
Net Income From Continuing Ops	6,148,000	759,000	-59,000	2,523,000
Net Income	6,147,000	754,000	-67,000	2,512,000
Shares Outstanding	588,000	588,000	588,000	588,000

Answer 1