Question

Analysis and Interpretation of Profitability
Balance sheets and income statements for 3M Company follow.

Consolidated Statements of Income
Years ended December 31 ($ millions)	2008	2007	2006
Net sales	$25,269	$24,462	$22,923
Operating expenses
Cost of sales	13,379	12,735	11,713
Selling, general and administrative expenses	5,245	5,015	5,066
Research, development and related expenses	1,404	1,368	1,522
Loss/(gain) from sale of business	23	(849)	(1,074)
Total operating expenses	20,051	18,269	17,227
Operating income	5,218	6,193	5,969
Interest expenses and income
Interest expense	215	210	122
Interest income	(105)	(132)	(51)
Total interest expense	110	78	71
Income before income taxes	5,108	6,115	5,625
Provision for income taxes	1,588	1,964	1,723
Net income including noncontrolling interest	3,520	4,151	3,902
Less: Net income attributable to noncontrolling interest	60	55	51
Net income	$ 3,460	$ 4,096	$ 3,851

Consolidated Balance Sheets
($ millions)	2008	2007
Assets
Current Assets
Cash and cash equivalents	$ 1,849	$ 1,896
Marketable securities-current	373	579
Accounts receivable-net	3,195	3,362
Inventories
Finished goods	1,505	1,349
Work in process	851	880
Raw materials and supplies	657	623
Total inventories	3,013	2,852
Other current assets	1,168	1,149
Total current assets	9,598	9,838
Marketable securities-noncurrent	352	480
Investments	111	298
Property, plant and equipment	18,812	18,390
Less: Accumulated depreciation	(11,926)	(11,808)
Property, plant and equipment-net	6,886	6,582
Goodwill	5,753	4,589
Intangible assets-net	1,398	801
Prepaid pension benefits	36	1,378
Other assets	1,659	728
Total assets	$ 25,793	$ 24,694
Liabilities
Current liabilities
Short-term borrowings and current portion of long-term debt	$ 1,552	$ 901
Accounts payable	1,301	1,505
Accrued payroll	644	580
Accrued income taxes	350	543
Other current liabilities	1,992	1,833
Total current liabilities	5,839	5,362
Long-term debt	5,166	4,019
Pension and postretirement benefits	2,847	--
Other liabilities	1,637	3,566
Total liabilities	15,489	12,947
Equity
3M Company shareholders' equity	9	9
Additional paid-in capital	3,006	2,785
Retained earnings	22,227	20,316
Treasury stock	(11,676)	(10,520)
Accumulated other comprehensive income (loss)	(3,686)	(843)
Total 3M Company shareholders' equity	9,880	11,747
Noncontrolling interest	424	--
Total equity	10,304	11,747
Total liabilities and equity	$ 25,793	$ 24,694

(a) Compute net operating profit after tax (NOPAT) for 2008. Assume that the combined federal and statutory rate is: 35.9% (Round your answer to the nearest whole number.)

(b) Compute net operating assets (NOA) for 2008 and 2007. Treat noncurrent Investments as a nonoperating item.

(c) Compute 3M's RNOA, net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2008. (Round your answers to two decimal places. Do not round until your final answer. Do not use NOPM x NOAT to calculate RNOA.)

(d) Compute net nonoperating obligations (NNO) for 2008 and 2007.

(e) Compute return on equity (ROE) for 2008. (Round your answers to two decimal places. Do not round until your final answer.)

(f) What is the nonoperating return component of ROE for 2008? (Round your answers to two decimal places.)

Answer 1

a)
NOPAT (2008)
Operating Income	5218
Less: Taxes (35.9%)	1873.262
	3344.738
	or 3345 (rounded off)
b)
Particulars	2008	2007
Operating Assets
Total Assets	25793	24694
Less: Investments (note)	-352	-480
Operating Assets (A)	25441	24214	Note : Investments amount includes Marketable
Operating Liabilities			securities long term
Total Liabilites	15489	12947
Less: Long Term Debt	-5166	-4019
Less: Current Portion of Long term debt	-1552	-901
Operating Liabilities (B)	8771	8027
Net Operating Assets = Operating Assets - Operating Liabilites	16670	16187
(A-B)
c)	2008
RNOA	NOPAT
	Average Net Operating Assets
	3344.738
	(16670+16187)/2
	3344.73
	16428.5
	20.36%
NOPM	2008
	Operating Profit
	Total Revenue
	3344.738
	25269
	13.24%
NOAT	2008
	Net Sales
	Average Operating Assets
	25269
	16428
	1.53816654
	or 1.5 times
d)	2008	2007
Net non operating obligations
Non Operating Obligations
Total Liabilities	15489	12947
Less: Operating Liabilities	8771	8027
Non Operating Obligations (A)	6718	4920
Less: Non operating assets
Total assets	25793	24694
Less: Operating Assets	25441	24214
Non Operating Assets (B)	352	480
Net non operating obligations (A-B)	6366	4440
e)
ROE	2008
	Net Income
	Shareholder's equity
	3460
	9880
	35.02%
f)
ROE	Operatig Return + Non Operating Return
35.02%	= 13.24% + Non Operating Return
21.78%	Non Operating Return