Company Overview

Cisco Systems, Inc. is the worldwide leader in networking for the Internet. Cisco's
Internet Protocol-based (IP) networking solutions are the foundation of the Internet and
most corporate, education, and government networks around the world. Cisco provides
the broadest line of solutions for transporting data, voice and video within buildings,
across campuses, or around the world.

Today, the Internet and computer networking are an essential part of business, learning
and personal communications and entertainment. Virtually all messages or transactions
passing over the Internet are carried quickly and securely through Cisco equipment.
Cisco solutions ensure that networks both public and private operate with maximum
performance, security, and flexibility. In addition, Cisco solutions are found in a growing
number of medium-sized commercial enterprises.

Cisco was founded in 1984 by a group of computer scientists from Stanford University.
Since the company's inception, Cisco engineers have been prominent in advancing the
development of IP- the basic language to communicate over the Internet and in private
networks. The company's tradition of innovation continues today with Cisco creating
leading products and key technologies that will make the Internet more useful and
dynamic in the years ahead. These technologies include: advanced routing and
switching, voice and video over IP, optical networking, wireless, storage networking,
security, broadband, and content networking. [ CITATION Abo \l 2057 ]

In addition to technology and product leadership, Cisco is recognized as an innovator in

how business is conducted. The company has been a pioneer in using the Internet to
provide customer support, sell products, offer training, and manage finances. Drawing
upon the company's own Internet best practices and core-value of customer focus,
Cisco has established the Internet Business Solutions Group (IBSG) dedicated to helping
top business leaders transform their own businesses into e-businesses.

As a company, Cisco operates on core values of customer focus and corporate

citizenship. The company's philanthropic efforts are committed to helping communities
prosper while also encouraging Cisco employees to learn about the needs of the
communities where Cisco operates. Also, to help bolster education around the world,
the company has founded Cisco Networking Academies in 128 countries dedicated to
teaching students to design, build, and maintain computer networks. [ CITATION Abo \l 2057
]

Cisco derives a little over half of its sales within the United States and 23% from Europe.
While these sales have fuelled the company’s health, there are opportunities for growth
in the company’s other geographic sales locations. China holds great potential for the
networking industry as a whole because of their rapidly expanding economy and router
demand from its firewall policies; Japan, on the other hand, has experienced stagnation
in its economy but the overall market size is very large. For Cisco, Japan represents only
4% of revenue streams, while China provides an estimated 5%. Cisco does not enjoy
such a dominant market share in these areas as it does elsewhere, and several key
competitors--including Juniper in Japan--generate a larger share of business from this
region. The company must also compete with entrenched regional networking
companies such as Huawei. Cisco has announced that it will be doubling its spending in
China, raising it to $16 billion. Cisco plans on spending that money towards adding R&D,
buying more components and services in China, building training academies, and
establishing a "green" technology centre.[ CITATION Abo \l 2057 ]

Their worldwide presence and revenue breakdown is shown in the table below.

CISCO Annual Report 2009

Cisco has one of the highest gross operating margins of its competitors because of its
size and scale. The size of the company allows it to maintain a large advantage in the
negotiations of its supply agreements with several of its key suppliers. Furthermore,
Cisco has the lowest operating costs (as a percentage of sales) of its competitors. Cisco
maintains cost levels at around 35% of total sales while other companies incur costs up
to half of their total revenues[ CITATION 200 \l 2057 ].

Cisco still leads the market in routers, accounting for approximately 60% of sales. Cisco
generates about 42% of its revenue from switches.
One key advantage afforded to Cisco by its size is the ability (and willingness) to spend
more on research and development than its competitors. As with most high technology
industries, research and development spending can drive innovation of new products
and stave off the obsolescence of older offerings.

In addition to other large networking companies with broad portfolios, Cisco also
competes with niche networking companies, especially as it reaches into more specified
product markets, one example would be Symantec, the leader in internet security.

Performance over the last 2-3 years

During Cisco’s 2009 fiscal year, revenue decreased 8.7% to $36.1 billion year over year.
Revenue fell due to a decrease in sales in all regions except Japan and all products and
services except communications. Its net income fell 23.8% to $6.1 billion from $8.1
billion in 2008[ CITATION 200 \l 2057 ].
Routing revenue ended the year at $6.3 billion, down 21% year-over-year. Switching
revenue was $12.0 billion, a decrease of 11% over last fiscal year. Advanced
Technologies revenue was down 4% year-over-year to $9.2 billion. Total service revenue
was approximately $7.0 billion, growth of 8% in fiscal year 2009 [ CITATION 200 \l 2057 ].
Below is Cisco's revenue (millions $) vs. operating expenses followed by its four primary
product sectors, with percent of total revenue for 2009.

[ CITATION 200 \l 2057 ]

[ CITATION 200 \l 2057 ]

Routers (22% of total revenue)

Cisco’s revenue from their router business in 2009 was $6.7 billion [ CITATION 200 \l 2057 ] .
Routers enable the communication of data packets over the Internet. Cisco aims to
improve the intelligence, security, reliability, scalability, and level of performance of
information transfer with each new router it develops.
Switches (41% of total revenue)
This sector generated $12.0 billion in revenue in 2009 [ CITATION CIS \l 2057 ].Cisco
currently holds around a 70% market share over the $14 billion dollar Ethernet
switching market[ CITATION 200 \l 2057 ].

Advanced Technologies (32% of total revenue)

Cisco's Advanced Technologies sector represents great opportunity for incremental
growth. The company is expected to expand this product sector through research and
development as well as acquisitions focusing on opportunities which include
 Higher networking layers
 More sophisticated security capabilities and
 More complex storage networking demands.
Other (5.6% of total revenue)
Cisco offers several services from this sector which includes both technical and more
involved support. A few examples of these services include:
 Advanced Services involves service and consulting for network users.
 Focused Technical Support aims to improve operational efficiency and shorten
problem resolution time.
 Network Optimization Support aims to increase the efficiency and improve the
performance of networks.

Financing Structure of Cisco

Debt to equity ratio[ CITATION wik \l 2057 ]

The company is majorly financed through equity as shown in the below table the Debt
to equity ratio year on year. The Debt to equity ratio is increasing over the year starting
with 0.69 in 2007 to 0.76 in 2009 which explains that assets are primarily financed
through equity.
5
   2009 2008 2007

Long Term Debt $10,295,000 $6,393,000 $6,408,000

Total Stockholders' Equity $38,212,000 $33,625,000 $30,918,000
Debt/Equity Ratio 0.27 0.19 0.21
[ CITATION Yah10 \l 2057 ]

Major competitor for CISCO is Hewlett-Packard Company and the financial structure is
that they are increase debt year on year so there debt to equity has been increased by
1.3 in 2007 to 1.83 in year 2009. As it has got high Debt to Equity ratio implies that a
company has an relatively higher commitment to pay fixed interest charges
 2009 2008 2007
 
Long Term Debt $13,980,000 $7,676,000 $4,997,000
Total Stockholders' Equity $29,960,000 $24,995,000 $21,586,000
Debt/Equity Ratio 0.47 0.31 0.23
[ CITATION Hew10 \l 2057 ]

Cisco is operating in a highly Technology drive and any new product by the competitor
can decrease the revenue of CISCO which can result in decrease in profit which in turn
they will be not be able to pay the interest on the debt, but with Debt to equity ratio
less than 0.30 it is able to cushion it out. But it also means that the CISCO is exposing
itself to a large amount of equity

Debt-Asset Ratio[ CITATION Inv10 \l 2057 ]

The Debt to Asset Ratio measures the percentage of the company's Total Assets that are
financed with debt. This ratio basically looks at what debt the company owes, and
compares that debt to what assets the company owns. Cisco has fairly less percentage
of it asset has been are financed more through equity rather than debt.
   2009 2008 2007
Long Term Debt $10,295,000 $6,393,000 $6,408,000
Total Assets $68,128,000 $58,734,000 $53,340,000
Debt-Asset Ratio 15% 11% 12%
[ CITATION Yah10 \l 2057 ]
Weighted average cost of capital

The weighted average cost of capital (WACC) is the rate that a company is expected to
pay on average to all its security holders to finance its assets. [ CITATION Wik \l 2057 ]

In order to calculate WACC we need the following information

 Cost of Equity
 Value of Equity
 Cost of debt
 Value of Debt

Cost of Equity

Cost of equity can be calculated using different technique. CAPM is one of the technique
to calculate the cost of equity and one of the method which also includes market risk
Beta. The formulae is

Ke   =   Rf   +   beta x ( Rm - Rf )

Ke   =Cost of equity
Rf   = Risk free rate of return
Rm = Market return

Here we have considered Risk free rate of return as the return on the 30 year T- bills of
US Treasuries which is 4.38%[ CITATION Blo10 \l 2057 ]

For market return we have taken the15 year annualised return on S&P 500 index which
is 10.92%[ CITATION SP5 \l 2057 ]

Beta is 1.23[ CITATION Bet \l 2057 ]

Therefore by substituting the value we get the cost of equity as 12.43%

Value of Equity
Equity value is the value of a company available to owners or shareholders [ CITATION
Val10 \l 2057 ].

Value of equity can be calculate by knowing the Current share price and number of
share outstanding.

No of shares Outstanding = 5710000000[ CITATION Sha10 \l 2057 ]

Current share price = $22.51 [ CITATION Sha101 \l 2057 ]

Value of Equity = No of shares Outstanding Current share price

Value of Equity will be = $128,532,100,000

Cost of debt

The effective rate that a company pays on its current debt. This can be measured in
either before- or after-tax returns; however, because interest expense is deductible, the
after-tax cost is seen most often. This is one part of the company's capital structure,
which also includes the cost of equity.[ CITATION Cos10 \l 2057 ].

The following table shows the Debt which CISCO has with the effective rates of the
bonds and the Fair value of the same.

Cost of Debt Amount Effective rate

5.25% fixed-rate notes, due 2011 $3,000,000,000 3.12%
5.50% fixed-rate notes, due 2016 $3,000,000,000 4.34%
4.95% fixed-rate notes, due 2019 $2,000,000,000 5.08%
5.90% fixed-rate notes, due 2039 $2,000,000,000 6.11%
 Average Effective rate 4.66%
Fair value of the Company’s long-term debt $10,500,000,000
[ CITATION CIS1 \l 2057 ]

Cost of debt is nothing but the average of the Effective rate which is 4.66% and we know
the Market value of bond as $10,500,000,000. We can now calculate the WACC.
   V K VK
12.43 $15,970,563,287.
Equity $128,532,100,000 % 35
Bond $10,500,000,000 4.66% $489,562,500.00
$16,460,125,787.
Total $139,032,100,000   35

So WACC will be

WACC = $16,460,125,787.35
$139,032,100,000

WACC = 11.84%