2. Caterpillar Inc. reported its annual financial statements for the 2018 fiscal year (See the Excel...

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2. Caterpillar Inc. reported its annual financial statements forthe 2018 fiscal year (See the Excel sheet attached for Cat’sfinancials in the last 4 years). The day before the report, thefirm’s market price per share closed at $127.07. For those who arenot familiar with Caterpillar, here is a brief description of theirbusiness: Caterpillar Inc. is an American Fortune 100 corporationwhich designs, develops, engineers, manufactures, markets and sellsmachinery, 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 in110 facilities worldwide. 51 plants are located in the UnitedStates and 59 overseas plants are located in Australia, Belgium,Brazil, Canada, China, Czech Republic, England, France, Germany,Hungary, India (Chennai), Indonesia, Italy, Japan, Mexico, theNetherlands, Northern Ireland, Poland, Russia, Singapore, SouthAfrica and Sweden. The market capitalization rate on the day beforethe report (Investors’ annual required rate of return given thefirm’s debt/equity structure) is 32.85%, i.e. k=0.3285. Use theinformation provided here as well as the financial statements toanswer the following questions: a) (4) What is Caterpillar’s 2018Return on Equity (ROE)? Please use the Dupont system (Show itscomponents) and the market-to-book method. b) (6) Find theintrinsic value per share using the Constant Dividend DiscountModel. (Hint: Retained earnings for 2018 is the change in thebalance of retained earnings since last year, i.e. 2018 retainedearnings – 2017 retained earnings). Compare it with yesterday’smarket price, is it time to add Caterpillar Inc. to our portfolio?c) (3) What is the major issue in using the constant dividenddiscount model when measuring the fundamental value of a firm? Usethis firm as an example to illustrate your point. d) (3) In youropinion, how can Caterpillar provide growth to shareholders? Andwhat type of macroeconomic factors/risks they are exposed to?(Think about its business line and where the growth in revenue cancome from) e) (4) Find the inventory turnover ratio and averagecollection period for years (2018, 2017, and 2016). Comparing theratios over the 3 years, is the company being more or lessefficient in its use of assets?
Income Statement
Revenue (All numbers in 000s) 12/31/2018 12/31/2017 12/31/2016 12/31/2015
TotalRevenue 54,722,000 45,462,000 38,537,000 47,011,000
Cost ofRevenue 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:
SellingGeneral 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
InterestExpense 490,000 1,478,000 1,751,000 1,220,000
IncomeBefore Tax 7,846,000 4,098,000 133,000 3,439,000
IncomeTax Expense 1,698,000 3,339,000 192,000 916,000
MinorityInterest 41,000 69,000 76,000 76,000
NetIncome From Continuing Ops 6,148,000 759,000 -59,000 2,523,000
NetIncome 6,147,000 754,000 -67,000 2,512,000
Shares Outstanding 588,000 588,000 588,000 588,000

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2. Caterpillar Inc. reported its annual financial statements forthe 2018 fiscal year (See the Excel sheet attached for Cat’sfinancials in the last 4 years). The day before the report, thefirm’s market price per share closed at $127.07. For those who arenot familiar with Caterpillar, here is a brief description of theirbusiness: Caterpillar Inc. is an American Fortune 100 corporationwhich designs, develops, engineers, manufactures, markets and sellsmachinery, 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 in110 facilities worldwide. 51 plants are located in the UnitedStates and 59 overseas plants are located in Australia, Belgium,Brazil, Canada, China, Czech Republic, England, France, Germany,Hungary, India (Chennai), Indonesia, Italy, Japan, Mexico, theNetherlands, Northern Ireland, Poland, Russia, Singapore, SouthAfrica and Sweden. The market capitalization rate on the day beforethe report (Investors’ annual required rate of return given thefirm’s debt/equity structure) is 32.85%, i.e. k=0.3285. Use theinformation provided here as well as the financial statements toanswer the following questions: a) (4) What is Caterpillar’s 2018Return on Equity (ROE)? Please use the Dupont system (Show itscomponents) and the market-to-book method. b) (6) Find theintrinsic value per share using the Constant Dividend DiscountModel. (Hint: Retained earnings for 2018 is the change in thebalance of retained earnings since last year, i.e. 2018 retainedearnings – 2017 retained earnings). Compare it with yesterday’smarket price, is it time to add Caterpillar Inc. to our portfolio?c) (3) What is the major issue in using the constant dividenddiscount model when measuring the fundamental value of a firm? Usethis firm as an example to illustrate your point. d) (3) In youropinion, how can Caterpillar provide growth to shareholders? Andwhat type of macroeconomic factors/risks they are exposed to?(Think about its business line and where the growth in revenue cancome from) e) (4) Find the inventory turnover ratio and averagecollection period for years (2018, 2017, and 2016). Comparing theratios over the 3 years, is the company being more or lessefficient in its use of assets?Income StatementRevenue (All numbers in 000s)12/31/201812/31/201712/31/201612/31/2015TotalRevenue54,722,00045,462,00038,537,00047,011,000Cost ofRevenue39,819,00033,638,00030,402,00035,897,000Gross Profit14,903,00011,824,0008,135,00011,114,000Operating Expenses:SellingGeneral and Administrative4,806,0004,425,0004,476,0004,363,000Depreciation1761000182300017750002092000Total Operating Expenses46,386,00039,886,00036,653,00042,352,000Earnings Before Interest and Taxes (EBIT)8,336,0005,576,0001,884,0004,659,000InterestExpense490,0001,478,0001,751,0001,220,000IncomeBefore Tax7,846,0004,098,000133,0003,439,000IncomeTax Expense1,698,0003,339,000192,000916,000MinorityInterest41,00069,00076,00076,000NetIncome From Continuing Ops6,148,000759,000-59,0002,523,000NetIncome6,147,000754,000-67,0002,512,000Shares Outstanding588,000588,000588,000588,000


Income Statement
Revenue (All numbers in 000s)	12/31/2018	12/31/2017	12/31/2016	12/31/2015
TotalRevenue	54,722,000	45,462,000	38,537,000	47,011,000
Cost ofRevenue	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:
SellingGeneral 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
InterestExpense	490,000	1,478,000	1,751,000	1,220,000
IncomeBefore Tax	7,846,000	4,098,000	133,000	3,439,000
IncomeTax Expense	1,698,000	3,339,000	192,000	916,000
MinorityInterest	41,000	69,000	76,000	76,000
NetIncome From Continuing Ops	6,148,000	759,000	-59,000	2,523,000
NetIncome	6,147,000	754,000	-67,000	2,512,000
Shares Outstanding	588,000	588,000	588,000	588,000