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Equity Valuation and Fundamental Analysis 04/29/2023 (a) Compute the return on assets (ROA) and return on equity (ROE) for 2016.

Return on assets is defined as, “Net income for that period divided by the average total assets during that period” (Easton, Halsey, & McAnally, 2021, ch.1, p. 18). ROA for 2016 is 9.139%. Return on equity is defined as, “Net income divided by average stockholders’ equity, where average equity is commonly defined as (beginning-year equity + ending-year equity)/2 (Easton, Halsey, & McAnally, 2021, ch. 1, p. 20). ROE for 2016 is 17.422%. (b) Complete the DuPont disaggregation of return on equity (ROE) for 2016. Analyze the DuPont financial ratios and discuss how Cisco Systems Inc. can achieve a high ROE. “DuPont analysis is a useful technique used to decompose the different drivers of return on equity” (Hargrave, 2022, par. 2). The DuPont disaggregation of return on equity for 2016 is 16.889%. A higher return on equity can be achieved by raising net income. This could be achieved by cutting unnecessary expenses in the business. (c) Compute net operating assets (NOA) for 2016. Net operating assets is defined as, “Operating assets minus operating liabilities” (Easton, Halsey, & McAnally, 2021, ch. 4, p. 15). NOA for 2016 is $53,808. (d) Compute net operating profit after tax (NOPAT) for 2016, assuming a federal and state statutory tax rate of 37%. (Round your answer to the nearest whole number.) Net operating profit after tax is calculated as, “Net operating profit before tax minus tax on operating profit” (Easton, Halsey, & McAnally, 2021, ch. 4, p. 19). NOPAT in 2016 is $8,140. (e) Forecast Cisco's sales, NOPAT, and NOA for years 2017. The forecasting amounts are as follows, Cisco’s sales for 2017 is $54,171.70. Net operating profit after tax for 2017 is $8,954. Net operating assets is $59,189. (f) Estimate the value of a share of Cisco common stock as of July 30, 2016 using the discounted cash flow (DCF) model and sales, NOPAT and NOA forecast in (e); Describe the DCF model, and explain the computations and results.

The discounted cash flow model can be thought of as the estimated value of the company (the enterprise value) and then determines the shareholders' portion, or the equity value, as the enterprise value less the value of the company's debt (Easton, Halsey, & McAnally, 2021, ch. 13, p. 3). In this case, the Cisco stock price per share using the DCF model is $10.25. I arrived at this answer by using the format given in the Excel sheet template. A big part of the DCF model is using the discount factor. If this factor is not used, then the stock price the DCF provides will be far off. (g) Cisco stock closed at $31.47 on September 8, 2016, the date the Form 10-K was filed with the SEC. How does your DCF valuation estimates compare with this closing price? What do you believe are some reasons for the difference? What investment decision is suggested from your results? The difference between my discounted cash flow model calculation stock price of $10.25 and the stock closing price of $31.47 is due to the fact that stock prices are not always rational. A person can research a stock all day long to find what the stock price should be, but that does not necessarily mean that will be the price. Stocks usually trade above or below what they should cost according to a model like the DCF model. In this instance, Cisco's stock is trading above the stock price I found in my DCF calculation, which means the stock is overvalued. As an investor, I would probably forgo buying Cisco's stock. Furthermore, if I was already invested in Cisco's stock, I might consider selling my position since it is overvalued. (h) Assume that Cisco’s weighted average cost of capital (WACC) increased to 15% due to the high inflation. Estimate the value of a share of Cisco common stock as of July 30, 2016, using the discounted cash flow (DCF) model and the forecast in (e); Describe the computations, and discuss how the increase in WACC affects Cisco’s stock price. The weighted average cost of capital is defined as, "An average of the after-tax cost of all long-term borrowing and the cost of equity" (Easton, Halsey, & McAnally, 2021, ch. 13, p. 3). Using the discounted cash flow model with a weighted average cost of capital at 15%, the stock price per share should be $7.01. I arrived at this computation by following the DCF model Excel template provided. I believe this shows that when the WACC increases, companies will have to spend more money and may potentially have lower sales, which would lower the value of the

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