Question

Analysis and Interpretation of Profitability
Balance sheets and income statements for Target Corporation follow.

Income Statement
For Fiscal Years Ended ($ millions)	2006	2005	2004
Sales	$ 51,271	$ 45,682	$ 40,928
Credit card revenues	1,349	1,157	1,097
Total revenues	52,620	46,839	42,025
Cost of sales	34,927	31,445	28,389
Selling, general and administrative expenses	11,185	9,797	8,657
Credit card expenses	776	737	722
Depreciation and amortization	1,409	1,259	1,098
Earnings before interest and income taxes	4,323	3,601	3,159
Net interest expense	463	570	556
Earnings before income taxes	3,860	3,031	2,603
Provisions for income taxes	1,452	1,146	984
Net earnings	$ 2,408	$ 1,885	$ 1,619

Balance Sheet
($ millions, except footnotes)	January 28, 2006	January 29, 2005
Assets
Cash and cash equivalents	$ 1,648	$ 2,245
Credit card receivables	5,666	5,069
Inventory	5,838	5,384
Other current assets	1,253	1,224
Total current assets	14,405	13,922
Property and equipment
Land	4,449	3,804
Buildings and improvements	14,174	12,518
Fixtures and equipment	3,219	2,990
Computer hardware and software	2,214	1,998
Construction-in-progress	1,158	962
Accumulated depreciation	(6,176)	(5,412)
Property and equipment, net	19,038	16,860
Other noncurrent assets	1,552	1,511
Total assets	$ 34,995	$ 32,293
Liabilities and shareholders' investment
Accounts payable	$ 6,268	$ 5,779
Accrued and other current liabilities	2,567	1,937
Current portion of long-term debt and notes payable	753	504
Total current liabilities	9,588	8,220
Long-term debt	9,119	9,034
Deferred income taxes	851	973
Other noncurrent liabilities	1,232	1,037
Shareholders' investment
Common stock	73	74
Additional paid-in-capital	2,121	1,810
Retained earnings	12,013	11,148
Accumulated other comprehensive income (loss)	(2)	(3)
Total shareholders' investment	14,205	13,029
Total liabilities and shareholders' equity	$ 34,995	$ 32,293

a. Compute ROE for 2006.

Do not round until your final answer. Round answers to two decimal places.

ROE =Answer%

b. Confirm that ROE equals ROE computed using the component measures for profit margin, asset turnover, and financial leverage using: ROE = PM * AT * FL.

   Compute the components of ROE.

   Do not round until your final answer. Round answers to two decimal places.

   PM = Answer%
    AT = Answer
    FL = Answer

c. Compute adjusted ROA. Assume a tax rate of: 38.3%.

Do not round until your final answer. Round your answer to two decimal places.
Adjusted ROA =Answer%

Answer 1

1. Net operating profit after tax is post tax operating profit of the Company before considering interest expense. In the given case operating income after excluding credit card income is 4,323-(1,349-776)=3,750. Tax rate is 38.3%. NOPAT=3,750*(1-0.383)=2,313.75. Credit card income is treated as non-oeprating income.

2. Net Operating asset of 2006=Total assets-Cash-Credit Card Receivale-Total Liabilities

=34,995-1,648-5,666-(6,268+2,567+753+9119+1232)=7,742.

Similarly, compute for 2005.

3. Return on net operating asset (2006) is 2,313.75/7742=29.88%

NOPM%=Operating Profit/Net Sales=3,750/51,271=7.31%

NOAT%=Operating Profit After Tax/ Net Sales=2,313.75/51,271=4.512%

4. Net non operating obligations=deferred income taxes=851.

5. Return of equity=Net Earnings/Shareholders Funds (excluding preferred stock)=2,408/14,205=16.95%

6. ROE>RNOA implies that borrowing yields greater return than cost of debt.