Question

Balance sheets and income statements for 3M Company follow.

3M Company
Consolidated Statements of Income
For Years Ended Dec. 31 ($ millions)		2015	2014	2013
Net sales		$30,274	$31,821	$30,871
Operating expenses
Cost of sales		15,383	16,447	16,106
Selling, general & administrative expenses		6,182	6,469	6,384
Research, development & related expenses		1,763	1,770	1,715
Total operating expenses		23,328	24,686	24,205
Operating income		6,946	7,135	6,666
Interest expense and income
Interest expense		149	142	145
Interest income		(26)	(33)	(41)
Total interest expense -net		123	109	104
Income before income taxes		6,823	7,026	6,562
Provision for income taxes		1,982	2,028	1,841
Net income inc. noncontrolling interest		4,841	4,998	4,721
Less: Net income attributable to NCI		8	42	62
Net income attributable to 3M		$4,833	$4,956	$4,659

3M Company
Consolidated Balance Sheets
At December 31 ($ millions, except per share amount)		2015	2014
Current assets
Cash and cash equivalents		$1,798	$1,897
Marketable securities--current		118	1,439
Accounts receivable, net		4,154	4,238
Inventories:
Finished goods		1,655	1,723
Work in process		1,008	1,081
Raw materials and supplies		855	902
Total inventories		3,518	3,706
Other current assets		1,398	1,023
Total current assets		10,986	12,303
Marketable securities--noncurrent		9	15
Investments		117	102
Property, plant and equipment		23,098	22,841
Less: Accumulated depreciation		(14,583)	(14,352)
Property, plant and equipment--net		8,515	8,489
Goodwill		9,249	7,050
Intangible assets -net		2,601	1,435
Prepaid pension benefits		188	46
Other assets		1,053	1,769
Total assets		$32,718	$31,209
Liabilities
Current liabilities
Short-term debt & current portion of LT debt		$2,044	$106
Accounts payable		1,694	1,807
Accrued payroll		644	732
Accrued income taxes		332	435
Other current liabilities		2,404	2,884
Total current liabilities		7,118	5,964
Long-term debt		8,753	6,705
Pension and postretirement benefits		3,520	3,843
Other liabilities		1,580	1,555
Total liabilities		20,971	18,067
Equity
3M Company shareholders' equity:
Common stock, par value $0.01 per share;
Shares outstanding --2015: 609,330,124;
Shares outstanding --2014: 635,134,594		9	9
Additional paid-in capital		4,791	4,379
Retained earnings		36,575	34,317
Treasury stock		(23,308)	(19,307)
Accumulated other comprehensive income (loss)		(6,359)	(6,289)
Total 3M Company shareholders' equity		11,708	13,109
Noncontrolling interest		39	33
Total equity		11,747	13,142
Total liabilities and equity		$32,718	$31,209

a. Compute the DuPont model component measures for profit margin, asset turnover, and financial leverage. Then, compute ROA.

Round profit margin and ROA to two decimal places (ex: 0.12345 = 12.35%)
Round asset turnover and financial leverage to three decimal places.

Profit margin = Answer%
Asset turnover = Answer
Financial leverage = Answer
ROA = Answer%


b. Compute ROE. Confirm that ROE equals ROE computed using the component measures from part a (ROE = PM x AT x FL).
Round answer to two decimal places (ex: 0.12345 = 12.35%)


c. Compute adjusted ROA (assume a statutory tax rate of 37% and pretax net interest expense of $123).
Round answer to two decimal places (ex: 0.12345 = 12.35%)

Answer 1

a) Profit margin: 15.96%
Asset turnover: 0.947
Financial leverage: 2.576
ROA: 15.12%

Working:
Profit margin = [Net income attributable to company stockholders / Sales]
=4833/30274 = 15.96%

Asset turnover = [Sales / Average assets]
= 30,274 / [(32718+31209)/2] = 0.947

Financial leverage = [Average assets / Average equity attributable to company stockholders]
= [(32718+31209)/2] / [(11,708+13,109) /2] = 2.576

ROA = [Net income attributable to company stockholders / Average assets]
= 4833 / [(32718+312099)/2] = 15.12%

b) ROE: 38.95%

ROE = [Net income attributable to company stockholders / Average equity attributable to company stockholders]
= 4833 / [(11708+13109)/2] = 38.95%

Confirmation : Profit margin * Assets turnover * Financial leverage
15.96 * 0.947 * 2.576
= 38.95 %

c) Adjusted ROA: 15.36%
{Net Income + ( Net Interest expense [1- Tax rate ])} / (Average Assets)

Adjusted ROA = {$4833 + ($123 × [1 - 0.37])} / [(32718+31209)/2