Question

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

Consolidated Statements of Income
Years ended December 31 ($ millions)	2012	2011	2010
Net sales	$29,904	$ 29,611	$ 226,662
Operating expenses
Cost of sales	15,685	15,693	13,831
Selling, general and administrative expenses	6,102	6,170	5,479
Research, development and related expenses	1,634	1,570	1,434
	--	--	--
Total operating expenses	23,421	23,433	20,744
Operating income	6,483	6,178	5,918
Interest expenses and income
Interest expense	171	186	201
Interest income	(39)	(39)	(38)
Total interest expense--net	132	147	163
Income before income taxes	6,351	6,031	5,755
Provision for income taxes	1,840	1,674	1,592
Net income including noncontrolling interest	$4,511	$4,357	$4,163
Less: Net income attributable to noncontrolling interest	67	74	78
Net income attributable to 3M	$ 4,444	$ 4,283	$ 4,085

Consolidated Balance Sheets
($ millions)	2012	2011
Assets
Current Assets
Cash and cash equivalents	$ 2,883	$ 2,219
Marketable securities-current	1,648	1,461
Accounts receivable-net of allowances of $105 and $108	4,061	3,867
Inventories
Finished goods	1,754	1,536
Work in process	1,186	1,061
Raw materials and supplies	897	819
Total inventories	3,837	3,416
Other current assets	1,201	1,277
Total current assets	13,630	12,240
Marketable securities-noncurrent	1,162	896
Investments	163	155
Property, plant and equipment	22,525	21,166
Less: Accumulated depreciation	(14,147)	(13,500)
Property, plant and equipment-net	8,378	7,666
Goodwill	7,385	7,047
Intangible assets-net	1,925	1,916
Prepaid pension benefits	16	40
Other assets	1,217	1,656
Total assets	$ 33,876	$ 31,616
Liabilities
Current liabilities
Short-term borrowings and current portion of long-term debt	$ 1,085	$ 682
Accounts payable	1,762	1,643
Accrued payroll	701	676
Accrued income taxes	371	355
Other current liabilities	2,281	2,085
Total current liabilities	6,200	5,441
Long-term debt	4,916	4,484
Pension and postretirement benefits	3,086	3.972
Other liabilities	1,634	1,857
Total liabilities	$15,836	$15,754
Equity
3M Company shareholders' equity	$9	$9
Additional paid-in capital	4,044	3,767
Retained earnings	30,679	28,348
Treasury stock	(12,407)	(11,679)
Accumulated other comprehensive income (loss)	(4,750)	(5,025)
Total 3M Company shareholders' equity	17,575	15,420
Noncontrolling interest	465	442
Total equity	$18,040	$15,862
Total liabilities and equity	$33,876	$31,616

(e) Compute return on equity (ROE) for 2012. (Round your answers to two decimal places. Do not round until your final answer.)
2012 ROE =Answer%

(f) What is the nonoperating return component of ROE for 2012? (Round your answers to two decimal places.)
Hint: Use your prior rounded answers to compute this answer.
2012 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.

Answer 1

) Nopat for 2012 is computed as [ 6483 - (1840 - ((171-39)*37%) = 4692

b)

	2012	2011
Total Assets	33876	31616
Less Cash and cash equilvalent	-2883	-2219
Less Investments	-163	-155
Operting assets (A)	30830	29242
Total current liability	6200	5441
Less short term borrowing	-1085	-682
Add Pension post retirement	3086	3972
Add other liabilties	1634	1857
Operating liability (B)	9835	10588
NOA (A-B)	20995	18654

c)

Formula	2012	Working
RNOA (NOPAT / NOA)	22.35%	=4692 / 20995
NOPM (NOPAT / Sales)	15.69%	=4692 / 29904
NOAT (Sales / NOA)	1.42	=29904 / 20995

d) Computation of NNO

	2012	2011
Long term loan	4916	4484
Short term borrowing	1085	682
Less Cash and cash equivalent	-2883	-2219
NNO	3118	2947

e) ROE = Net income attributable to 3m divided by Average of Total 3m company equity and Total equity

4444 / (17575 + 18040)/2 = 24.96%

f) Non operating return component = ROE - RNOA

= 24.96% - 22.35% = 2.61%

g) The best reference that can be drawn is ROE >RNOA imples that 3M is able to borrow money to fund operating assets that yield a return greater than its cost of debt