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

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) 2015 2014 2013
Net sales $30,274 $31,821 $30,871
Operating expenses
Cost of sales 15,383 16,447 16,106
Selling, general and administrative expenses 6,182 6,469 6,384
Research, development and 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 expenses 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 including noncontrolling interest $4,841 $4,998 $4,721
Less: Net income attributable to noncontrolling interest 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 of allowances of $91 and $94 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 borrowings and current portion of long-term 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 net operating profit after tax (NOPAT) for 2015. Assume that the combined federal and statutory rate is: 37.0% (Round your answer to the nearest whole number.)
2015 NOPAT =Answer($ millions)

(b) Compute net operating assets (NOA) for 2015 and 2014. Treat noncurrent investments as a nonoperating item.
2015 NOA =Answer($ millions)
2014 NOA =Answer($ millions)

(c) Compute 3M's RNOA, net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2015. (Round your answers to two decimal places. Do not round until your final answer. Do not use NOPM x NOAT to calculate RNOA.)
2015 RNOA =Answer%
2015 NOPM =Answer%
2015 NOAT =Answer

(d) Compute net nonoperating obligations (NNO) for 2015 and 2014.
2015 NNO =Answer($ millions)
2014 NNO =Answer($ millions)

(e) Compute return on equity (ROE) for 2015. (Round your answers to two decimal places. Do not round until your final answer.)
2015 ROE =Answer%

(f) What is the nonoperating return component of ROE for 2015? (Round your answers to two decimal places.)
2015 nonoperating return =Answer%

(g) Which of the following statements reflects the best inference we can draw from the difference between 3M's ROE and RNOA?

ROE > RNOA implies that 3M has taken on too much financial leverage.

ROE > RNOA implies that 3M is able to borrow money to fund operating assets that yield a return greater than its cost of debt.

ROE > RNOA implies that 3M's equity has grown faster than its NOA.

ROE > RNOA implies that 3M has increased its financial leverage during the period.

Solutions

Expert Solution

Part A

2015 NOPAT = $6,946 (operating income) – [$1982 (provision for interest income taxes) + ($123 {total interest expense-net} × 0.37)] = 6946 - (1982+(123*0.37)) = $4918

Part B

2015 NOA = $32718 (total assets) - $1798 (Cash and equivalents) - $118 (Marketable securities) - $117 (investments)- $9 (Marketable securities-non-current) - ($7118 {total current liabilities} - $2044 {short term borrowings & current portion of long term debt}) -$3520 {Pension & post retirement} -$1580 {other liabilities} = $20,502

2014 NOA = ($31,209 - $1897 - $1439- $15- $102) – ($5964 - $106) - $3843 - $1555= $16500

Part C

2015 RNOA = $4,918 (NOPAT) / [($20502 (2015 NOA) + $16,500 {NOA 2014}) / 2] = 26.58%

2015 NOPM = $4,918 (NOPAT)/ $30274 (Net sales) = 16.24%

2015 NOAT = $30274 (Net sales) / [($20502 (2015 NOA) + $16,500 {2014 NOA)) / 2] = 1.64

Part D

2015 NNO = ($2044+ $8753) – ($1798+ $118+ $9 + $117) = $8755

2014 NNO = ($106 + $6705) – ($1897 + $1,439 + $15 + $102) = $3358

Part E

2015 ROE = $4,833 / [($11708 + $13109) / 2] = 38.95%

Part F

2015 nonoperating return = ROE – RNOA = 38.95% – 26.58% = 12.37%

Part G

Answer is option B

ROE>RNOA implies that 3M is able to borrow money to fund operating assets that yield areturn greater than the cost of the debt.

Confirm:2012 NOA= NNO + Total SE $18,185 = $145 + $18,04012

Image of page 12

2015 NOPM = $4,918 (NOPAT)/ $30274 (Net sales) = 16.24%

2015 NOAT = $30274 (Net sales) / [($20502 (2015 NOA) + $16,500 {2014 NOA)) / 2] = 1.64

ROA = 16.24% (NOPM) × 1.64 (NOAT)= 26.63%

Part D


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