(Solution) Module 3 Assignment – Compute NOPAT

Module 3 Assignment

Question 1

Question text

Compute, Disaggregate, and Interpret RNOA of Competitors

Halliburton and Schlumberger compete in the oil field services sector. Refer to the following 2018 financial data for the two companies to answer the requirements.

$ millions	HAL	SLB
Total revenue	$23,995	$32,815
Pretax net nonoperating expense	653	426
Net income	1,657	2,177
Average operating assets	23,361	67,836
Average operating liabilities	5,888	16,499
Marginal tax rate	22%	19%
Return on equity	18.56%	5.86%

a. Compute return on net operating assets (RNOA) for each company.

b. Disaggregate RNOA into net operating profit margin (NOPM) and net operating asset turnover (NOAT) for each company.

Solution

a. Compute return on net operating assets (RNOA) for each company.

b. Disaggregate RNOA into net operating profit margin (NOPM) and net operating asset turnover (NOAT) for each company.

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Question 2

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Question text – Compute NOPAT

The income statement for TJX Companies follows.

THE TJX COMPANIES, INC. Consolidated Statements of Income
Fiscal Year Ended ($ thousands)	February 2, 2019
Net sales	$38,972,934
Cost of sales, including buying and occupancy costs	27,831,177
Selling, general and administrative expenses	6,923,564
Pension settlement charge	36,122
Interest expense, net	8,860
Income before provision for income taxes	4,173,211
Provision for income taxes	1,113,413
Net income	$3,059,798

Assume that the combined federal and state statutory tax rate is 22%.

a. Compute NOPAT using the formula: NOPAT = Net income + NNE.

b. Compute NOPAT using the formula: NOPAT = NOPBT − Tax on operating profit.

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Question 3

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Question text

Analysis and Interpretation of Profitability

Balance sheets and income statements for 3M Company follow.

3M COMPANY
Consolidated Statements of Income
For Years ended December 31 ($ millions)	2018	2017
Net sales	$32,765	$31,657
Operating expenses
Cost of sales	16,682	16,055
Selling, general and administrative expenses	7,602	6,626
Research, development and related expenses	1,821	1,870
Gain on sale of businesses	(547)	(586)
Total operating expenses	25,558	23,965
Operating income	7,207	7,692
Other expense, net*	207	144
Income before income taxes	7,000	7,548
Provision for income taxes	1,637	2,679
Net income including noncontrolling interest	5,363	4,869
Less: Net income attributable to noncontrolling interest	14	11
Net income attributable to 3M	$5,349	$4,858
*Interest expense, gross	$350	$322

3M COMPANY
Consolidated Balance Sheets
At December 31 ($ millions, except per share amount)	2018	2017
Current Assets
Cash and cash equivalents	$2,853	$3,053
Marketable securities	380	1,076
Accounts receivable	5,020	4,911
Total inventories	4,366	4,034
Prepaids	741	937
Other current assets	349	266
Total current assets	13,709	14,277
Property, plant and equipment-net	8,738	8,866
Goodwill	10,051	10,513
Intangible assets-net	2,657	2,936
Other assets	1,345	1,395
Total assets	$36,500	$37,987
Current liabilities
Short-term borrowings and current portion of long-term debt	$1,211	$1,853
Accounts payable	2,266	1,945
Accrued payroll	749	870
Accrued income taxes	243	310
Other current liabilities	2,775	2,709
Total current liabilities	7,244	7,687
Long-term debt	13,411	12,096
Pension and postretirement benefits	2,987	3,620
Other liabilities	3,010	2,962
Total liabilities	26,652	26,365
3M Company shareholders’ equity
Common stock, par value	9	9
Additional paid-in capital	5,643	5,352
Retained earnings	40,636	39,115
Treasury stock	(29,626)	(25,887)
Accumulated other comprehensive income (loss)	(6,866)	(7,026)
Total 3M Company shareholders’ equity	9,796	11,563
Noncontrolling interest	52	59
Total equity	9,848	11,622
Total liabilities and equity	$36,500	$37,987
Combined federal and state statutory tax rate	22%

a. Compute net operating profit after tax (NOPAT) for 2018. Assume that the combined federal and state statutory tax rate is 22%.

b. Compute net operating assets (NOA) for 2018 and 2017.

c. Compute and disaggregate 3M’s RNOA into net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2018. Demonstrate that RNOA = NOPM × NOAT.

***RNOA may be different from first RNOA calculation due to rounding

d. Compute net nonoperating obligations (NNO) for 2018 and 2017. Confirm the relation: NOA = NNO + Total equity

e. Compute return on equity (ROE) for 2018.

f. What is the nonoperating return component of ROE for 2018?

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Related: (Solved) Module 4 Assignment Compute profitability measures RNOA

Question 4

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Question text – Analysis and Interpretation of Profitability

Balance sheets and income statements for Costco Wholesale Corporation follow.

Costco Wholesale Corporation
Consolidated Statements of Earnings
For Fiscal Years Ended ($ millions)	September 2, 2018
Total revenue	$141,576
Operating expenses
Merchandise costs	123,152
Selling, general and administrative	13,876
Preopening expenses	68
Operating Income	4,480
Other (income) expense
Interest expense	159
Interest income and other, net	(121)
Income before income taxes	4,442
Provision for income taxes	1,263
Net income including noncontrolling interests	3,179
Net income attributable to noncontrolling interests	(45)
Net income attributable to Costco	$3,134

Costco Wholesale Corporation
Consolidated Balance Sheets
($ millions, except par value and share data)	September 2, 2018	September 3, 2017
Current assets
Cash and cash equivalents	$6,055	$4,546
Short-term investments	1,204	1,233
Receivables, net	1,669	1,432
Merchandise inventories	11,040	9,834
Other current assets	321	272
Total current assets	20,289	17,317
Net property and equipment	19,681	18,161
Other assets	860	869
Total assets	$40,830	$36,347
Current liabilities
Accounts payable	$11,237	$9,608
Accrued salaries and benefits	2,994	2,703
Accrued member rewards	1,057	961
Deferred membership fees	1,624	1,498
Other current liabilities	3,014	2,725
Total current liabilities	19,926	17,495
Long-term debt	6,487	6,573
Other liabilities	1,314	1,200
Total liabilities	27,727	25,268
Equity
Preferred stock, $0.01 par value:	0	0
Common stock, $0.01 par value:	4	4
Additional paid-in-capital	6,107	5,800
Accumulated other comprehensive loss	(1,199)	(1,014)
Retained earnings	7,887	5,988
Total Costco stockholders’ equity	12,799	10,778
Noncontrolling interests	304	301
Total equity	13,103	11,079
Total liabilities and equity	$40,830	$36,347
Combined federal and state statutory tax rate	22%

(a) Compute net operating profit after tax (NOPAT) for 2018. Assume that the combined federal and state statutory tax rate is 22%.

	NOPAT
	Answer 1

(b) Compute net operating assets (NOA) for 2018 and 2017.

	Year	NOA
	2018	Answer 2
	2017	Answer 3

(c) Compute Costco’s RNOA, net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2018.

(d) Compute net nonoperating obligations (NNO) for 2018 and 2017. Confirm the relation: NOA = NNO + Total equity.

(e) Compute return on equity (ROE) for 2018.

(f) Infer the nonoperating return component of ROE for 2018.

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Question 5

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Question text – Direct Computation of Nonoperating Return

Balance sheets and income statements for 3M Company follow.

3M COMPANY
Consolidated Statements of Income
For Years ended December 31 ($ millions)	2018	2017
Net sales	$32,765	$31,657
Operating expenses
Cost of sales	16,682	16,055
Selling, general and administrative expenses	7,602	6,626
Research, development and related expenses	1,821	1,870
Gain on sale of businesses	(547)	(586)
Total operating expenses	25,558	23,965
Operating income	7,207	7,692
Other expense, net*	207	144
Income before income taxes	7,000	7,548
Provision for income taxes	1,637	2,679
Net income including noncontrolling interest	5,363	4,869
Less: Net income attributable to noncontrolling interest	14	11
Net income attributable to 3M	$5,349	$4,858
*Interest expense, gross	$350	$322

3M COMPANY
Consolidated Balance Sheets
At December 31 ($ millions, except per share amount)	2018	2017
Current Assets
Cash and cash equivalents	$2,853	$3,053
Marketable securities	380	1,076
Accounts receivable	5,020	4,911
Total inventories	4,366	4,034
Prepaids	741	937
Other current assets	349	266
Total current assets	13,709	14,277
Property, plant and equipment-net	8,738	8,866
Goodwill	10,051	10,513
Intangible assets-net	2,657	2,936
Other assets	1,345	1,395
Total assets	$36,500	$37,987
Current liabilities
Short-term borrowings and current portion of long-term debt	$1,211	$1,853
Accounts payable	2,266	1,945
Accrued payroll	749	870
Accrued income taxes	243	310
Other current liabilities	2,775	2,709
Total current liabilities	7,244	7,687
Long-term debt	13,411	12,096
Pension and postretirement benefits	2,987	3,620
Other liabilities	3,010	2,962
Total liabilities	26,652	26,365
3M Company shareholders’ equity
Common stock, par value	9	9
Additional paid-in capital	5,643	5,352
Retained earnings	40,636	39,115
Treasury stock	(29,626)	(25,887)
Accumulated other comprehensive income (loss)	(6,866)	(7,026)
Total 3M Company shareholders’ equity	9,796	11,563
Noncontrolling interest	52	59
Total equity	9,848	11,622
Total liabilities and equity	$36,500	$37,987
Combined federal and state statutory tax rate	22.00%
ROE	50.09%
RNOA	25.89%

a. Compute net nonoperating expense (NNE) and net operating profit after tax (NOPAT). Assume a tax rate of 22%.

b. Compute net nonoperating obligations (NNO).

c. Compute financial leverage (FLEV).

d. Compute NNEP and Spread.

e. Compute the noncontrolling interest ratio (NCI ratio).

f. Confirm the relation: ROE = [RNOA + (FLEV × Spread)] × NCI ratio.

***ROE may be different due to rounding

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