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(a) Compute net operating assets (NOA) for 2019. Hint: Treat Financing receivable as operating assets.

(b) Compute net operating profit after tax (NOPAT) for 2019, assuming a federal and state statutory tax rate of 22%. Assume that all items on the 2019 income statement will persist. (Round your answer to the nearest whole number.)

(c) Use the parsimonious forecast method, to forecast Ciscos sales, NOPAT, and NOA for 2020 through 2023 and the terminal period using the following assumptions.

* Use sales rounded to nearest whole number for this calculation.

(d) Estimate the value of a share of Cisco common stock using the residual operating income (ROPI) model as of July 27, 2019; assume a discount rate (WACC) of 7.6%, common shares outstanding of 5,029 million, and net nonoperating obligations (NNO) of $(8,747) million (NNO is negative, which means that Cisco has net nonoperating investments).

Instructions:

• Use your rounded answers for subsequent calculations.

• Round all answers to the nearest whole number, except for discount factors and stock price per share.

• Round discount factors to 5 decimal places.

• Round stock price per share to two decimal places.
• Use a negative sign with your NNO answer.

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Forecasting with the Parsimonious Method and Estimating Share Value Using the ROPI Model Following are income statements and balance sheets for Cisco Systems. Cisco Systems Consolidated Statements of Income Years Ended December ($ millions) July 27, 2019 July 28, 2018 Revenue Product $39,005 $36,709 Service 12,899 12,621 Total revenue 51,904 49,330 Cost of sales Product 14,863 14,427 Service 4,375 4,297 Total cost of sales 19,238 18,724 Gross margin 32,666 30,606 Operating expenses Research and development 6,577 6,332 Sales and marketing 9,571 9,242 General and administrative 1,827 2,144 Amortization of purchased intangible assets Restructuring and other charges Total operating expenses 18,447 18,297 Operating income 14,219 12,309 Interest income 1,308 1,508 Interest expense (859) (943) Other income (loss), net (97) Interest and other income (loss), net 352 Income before provision for income taxes 14,571 13,039 Provision for income taxes 2,950 12,929 Net income $11,621 $110 150 221 322 358 165 730 July 27, 2019 July 28, 2018 $8,934 37,614 5,554 1,846 4,949 2,940 61,837 $11,750 21,663 5,491 1,383 5,095 2,373 47,755 2,789 4,958 33,529 2,201 4,065 2,496 $97,793 3,006 4,882 31,706 Cisco Systems Inc. Consolidated Balance Sheets In millions, except par value Assets Current assets Cash and cash equivalents Investments Accounts receivable, net of allowance for doubtful accounts Inventories Financing receivables, net Other current assets Total current assets Property and equipment, net Financing receivables, net Goodwill Purchased intangible assets, net Deferred tax assets Other assets Total assets Liabilities and equity Current liabilities Short-term debt Accounts payable Income taxes payable Accrued compensation Deferred revenue Other current liabilities Total current liabilities Long-term debt Income taxes payable Deferred revenue Other long-term liabilities Total liabilities 2,552 3,219 1,582 $108,784 $10,191 2,059 1,149 3,221 10,668 4,424 31,712 14,475 8,927 $5,238 1,904 1,004 2.986 11,490 4,413 27,035 20,331 8,5 7,799 1,309 64,222 8,195 1,434 65,580 NOA = $ 0 2019 NOPAT = $ 0 596 Sales growth 2020-2023 Terminal growth 196 Net operating profit margin 2019 rate rounded to three decimal places Net operating asset turnover 2019 rate rounded to three decimal places Reported 2019 Ox $ 2023 Est. 0 X $ Terminal Period OX $ CSCO ($ millions) Sales (rounded two decimal places) Sales (rounded nearest whole number) NOPAT (rounded nearest whole number)* NOA (rounded nearest whole number)* Forecast Horizon 2021 Est. 2022 Est. 0 x $ 0X $ 0 x OX OX 2020 Est. Ox $ OX OX 0 x OX OX OX OX OX 0X OX OX OX Forecast Horizon 2021 Est. 2022 Est. Terminal Period 2019 Est. 2023 Est. 0X OX Ox OX OX OX Ox OX OX OX 0 x CSCO Reported ($ millions) 2019 ROPI Model ROPI [NOPAT - (NOA beg x WACC)] Discount factor Present value of horizon ROPI Cum present value of horizon ROPI $ 0 x Present value of terminal ROPI 0 X NOA 0 X Total firm value 0 X NNO 0 X Firm equity value $ OX Shares outstanding (millions) OX Stock value per share $ OX $ $ $ Forecasting with the Parsimonious Method and Estimating Share Value Using the ROPI Model Following are income statements and balance sheets for Cisco Systems. Cisco Systems Consolidated Statements of Income Years Ended December ($ millions) July 27, 2019 July 28, 2018 Revenue Product $39,005 $36,709 Service 12,899 12,621 Total revenue 51,904 49,330 Cost of sales Product 14,863 14,427 Service 4,375 4,297 Total cost of sales 19,238 18,724 Gross margin 32,666 30,606 Operating expenses Research and development 6,577 6,332 Sales and marketing 9,571 9,242 General and administrative 1,827 2,144 Amortization of purchased intangible assets Restructuring and other charges Total operating expenses 18,447 18,297 Operating income 14,219 12,309 Interest income 1,308 1,508 Interest expense (859) (943) Other income (loss), net (97) Interest and other income (loss), net 352 Income before provision for income taxes 14,571 13,039 Provision for income taxes 2,950 12,929 Net income $11,621 $110 150 221 322 358 165 730 July 27, 2019 July 28, 2018 $8,934 37,614 5,554 1,846 4,949 2,940 61,837 $11,750 21,663 5,491 1,383 5,095 2,373 47,755 2,789 4,958 33,529 2,201 4,065 2,496 $97,793 3,006 4,882 31,706 Cisco Systems Inc. Consolidated Balance Sheets In millions, except par value Assets Current assets Cash and cash equivalents Investments Accounts receivable, net of allowance for doubtful accounts Inventories Financing receivables, net Other current assets Total current assets Property and equipment, net Financing receivables, net Goodwill Purchased intangible assets, net Deferred tax assets Other assets Total assets Liabilities and equity Current liabilities Short-term debt Accounts payable Income taxes payable Accrued compensation Deferred revenue Other current liabilities Total current liabilities Long-term debt Income taxes payable Deferred revenue Other long-term liabilities Total liabilities 2,552 3,219 1,582 $108,784 $10,191 2,059 1,149 3,221 10,668 4,424 31,712 14,475 8,927 $5,238 1,904 1,004 2.986 11,490 4,413 27,035 20,331 8,5 7,799 1,309 64,222 8,195 1,434 65,580 NOA = $ 0 2019 NOPAT = $ 0 596 Sales growth 2020-2023 Terminal growth 196 Net operating profit margin 2019 rate rounded to three decimal places Net operating asset turnover 2019 rate rounded to three decimal places Reported 2019 Ox $ 2023 Est. 0 X $ Terminal Period OX $ CSCO ($ millions) Sales (rounded two decimal places) Sales (rounded nearest whole number) NOPAT (rounded nearest whole number)* NOA (rounded nearest whole number)* Forecast Horizon 2021 Est. 2022 Est. 0 x $ 0X $ 0 x OX OX 2020 Est. Ox $ OX OX 0 x OX OX OX OX OX 0X OX OX OX Forecast Horizon 2021 Est. 2022 Est. Terminal Period 2019 Est. 2023 Est. 0X OX Ox OX OX OX Ox OX OX OX 0 x CSCO Reported ($ millions) 2019 ROPI Model ROPI [NOPAT - (NOA beg x WACC)] Discount factor Present value of horizon ROPI Cum present value of horizon ROPI $ 0 x Present value of terminal ROPI 0 X NOA 0 X Total firm value 0 X NNO 0 X Firm equity value $ OX Shares outstanding (millions) OX Stock value per share $ OX $ $ $

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