Stock Analysis on Net
Stock Analysis on Net

Cisco Systems Inc. (NASDAQ:CSCO)

Present Value of Free Cash Flow to the Firm (FCFF)

Microsoft Excel

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

Intrinsic Stock Value (Valuation Summary)

Cisco Systems Inc., free cash flow to the firm (FCFF) forecast

US$ in millions, except per share data

Microsoft Excel
Year Value FCFFt or Terminal value (TVt) Calculation Present value at 12.96%
01 FCFF0 19,349
1 FCFF1 21,327 = 19,349 × (1 + 10.22%) 18,880
2 FCFF2 23,130 = 21,327 × (1 + 8.45%) 18,126
3 FCFF3 24,676 = 23,130 × (1 + 6.69%) 17,119
4 FCFF4 25,890 = 24,676 × (1 + 4.92%) 15,900
5 FCFF5 26,706 = 25,890 × (1 + 3.15%) 14,519
5 Terminal value (TV5) 280,823 = 26,706 × (1 + 3.15%) ÷ (12.96% – 3.15%) 152,675
Intrinsic value of Cisco Systems Inc. capital 237,219
Less: Debt (fair value) 8,700
Intrinsic value of Cisco Systems Inc. common stock 228,519
 
Intrinsic value of Cisco Systems Inc. common stock (per share) $56.44
Current share price $48.10

Based on: 10-K (reporting date: 2023-07-29).

1 See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Weighted Average Cost of Capital (WACC)

Cisco Systems Inc., cost of capital

Microsoft Excel
Value1 Weight Required rate of return2 Calculation
Equity (fair value) 194,766 0.96 13.37%
Debt (fair value) 8,700 0.04 3.87% = 4.78% × (1 – 19.00%)

Based on: 10-K (reporting date: 2023-07-29).

1 US$ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 4,049,187,080 × $48.10
= $194,765,898,548.00

   Debt (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

   Required rate of return on debt. See details »

   Required rate of return on debt is after tax.

   Estimated (average) effective income tax rate
= (17.70% + 18.40% + 20.10% + 19.70% + 14.10% + 19.10%) ÷ 6
= 19.00%

WACC = 12.96%

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Cisco Systems Inc., PRAT model

Microsoft Excel
Average Jul 29, 2023 Jul 30, 2022 Jul 31, 2021 Jul 25, 2020 Jul 27, 2019 Jul 28, 2018
Selected Financial Data (US$ in millions)
Interest expense 427 360 434 585 859 943
Net income 12,613 11,812 10,591 11,214 11,621 110
 
Effective income tax rate (EITR)1 17.70% 18.40% 20.10% 19.70% 14.10% 19.10%
 
Interest expense, after tax2 351 294 347 470 738 763
Add: Cash dividends declared 6,302 6,224 6,166 6,016 5,979 5,968
Interest expense (after tax) and dividends 6,653 6,518 6,513 6,486 6,717 6,731
 
EBIT(1 – EITR)3 12,964 12,106 10,938 11,684 12,359 873
 
Short-term debt 1,733 1,099 2,508 3,005 10,191 5,238
Long-term debt, excluding current portion 6,658 8,416 9,018 11,578 14,475 20,331
Equity 44,353 39,773 41,275 37,920 33,571 43,204
Total capital 52,744 49,288 52,801 52,503 58,237 68,773
Financial Ratios
Retention rate (RR)4 0.49 0.46 0.40 0.44 0.46 -6.71
Return on invested capital (ROIC)5 24.58% 24.56% 20.72% 22.25% 21.22% 1.27%
Averages
RR 0.45
ROIC 22.67%
 
FCFF growth rate (g)6 10.22%

Based on: 10-K (reporting date: 2023-07-29), 10-K (reporting date: 2022-07-30), 10-K (reporting date: 2021-07-31), 10-K (reporting date: 2020-07-25), 10-K (reporting date: 2019-07-27), 10-K (reporting date: 2018-07-28).

1 See details »

2023 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 427 × (1 – 17.70%)
= 351

3 EBIT(1 – EITR) = Net income + Interest expense, after tax
= 12,613 + 351
= 12,964

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [12,964 – 6,653] ÷ 12,964
= 0.49

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 12,964 ÷ 52,744
= 24.58%

6 g = RR × ROIC
= 0.45 × 22.67%
= 10.22%

FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (203,466 × 12.96% – 19,349) ÷ (203,466 + 19,349)
= 3.15%

where:

Total capital, fair value0 = current fair value of Cisco Systems Inc. debt and equity (US$ in millions)
FCFF0 = the last year Cisco Systems Inc. free cash flow to the firm (US$ in millions)
WACC = weighted average cost of Cisco Systems Inc. capital

FCFF growth rate (g) forecast

Cisco Systems Inc., H-model

Microsoft Excel
Year Value gt
1 g1 10.22%
2 g2 8.45%
3 g3 6.69%
4 g4 4.92%
5 and thereafter g5 3.15%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= 10.22% + (3.15% – 10.22%) × (2 – 1) ÷ (5 – 1)
= 8.45%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 10.22% + (3.15% – 10.22%) × (3 – 1) ÷ (5 – 1)
= 6.69%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 10.22% + (3.15% – 10.22%) × (4 – 1) ÷ (5 – 1)
= 4.92%