Question

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

Income Statement
For Fiscal Years Ended ($ millions)	2008	2007	2006
Sales	$ 61,471	$ 57,878	$ 51,271
Credit card revenues	1,896	1,612	1,349
Total revenues	63,367	59,490	52,620
Cost of sales	41,895	39,399	34,927
Selling, general and administrative expenses	13,704	12,819	11,185
Credit card expenses	837	707	776
Depreciation and amortization	1,659	1,496	1,409
Earnings before interest and income taxes	5,272	5,069	4,323
Net interest expense	647	572	463
Earnings before income taxes	4,625	4,497	3,860
Provisions for income taxes	1,776	1,710	1,452
Net earnings	$ 2,849	$ 2,787	$ 2,408

Balance Sheet
($ millions, except footnotes)	February 2, 2008	February 3, 2007
Assets
Cash and cash equivalents	$ 2,450	$ 813
Credit card receivables	8,054	6,194
Inventory	6,780	6,254
Other current assets	1,622	1,445
Total current assets	18,906	14,706
Property and equipment
Land	5,522	4,934
Buildings and improvements	18,329	16,110
Fixtures and equipment	3,858	3,553
Computer hardware and software	2,421	2,188
Construction-in-progress	1,852	1,596
Accumulated depreciation	(7,887)	(6,950)
Property and equipment, net	24,095	21,431
Other noncurrent assets	1,559	1,212
Total assets	$ 44,560	$ 37,349
Liabilities and shareholders' investment
Accounts payable	$ 6,721	$ 6,575
Accrued and other current liabilities	3,097	3,180
Current portion of long-term debt and notes payable	1,964	1,362
Total current liabilities	11,782	11,117
Long-term debt	15,126	8,675
Deferred income taxes	470	577
Other noncurrent liabilities	1,875	1,347
Shareholders' investment
Common stock	68	72
Additional paid-in-capital	2,656	2,387
Retained earnings	12,761	13,417
Accumulated other comprehensive income (loss)	(178)	(243)
Total shareholders' investment	15,307	15,633
Total liabilities and shareholders' equity	$ 44,560	$ 37,349

HINT: For Sales use "Total revenues" for your computations, when applicable.

(a) Compute net operating profit after tax (NOPAT) for 2008. Assume that the combined federal and statutory rate is: 39%. (Round your answer to the nearest whole number.)

2008 NOPAT = Answer ($ millions)

(b) Compute net operating assets (NOA) for 2008 and 2007.

2008 NOA = Answer ($ millions)
2007 NOA = Answer ($ millions)

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

2008 RNOA = Answer%
2008 NOPM = Answer%
2008 NOAT = Answer

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

2008 NNO = Answer ($ millions)
2007 NNO = Answer ($ millions)

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

2008 ROE = Answer%

(f) Infer the nonoperating return component of ROE for 2008. (Use answers from above to calculate. Round your answer to two decimal places.)

2008 nonoperating return = Answer%

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

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

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

ROE > RNOA implies that Target is able to borrow money to fund operating assets that yield a return greater than its cost of debt; the excess accrues to the benefit of Target's stockholders.

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

Answer 1

a) NOPAT = Operating Profit x (1-Tax Rate)

Or in other words, NOPAT = EBIT(1-Tax Rate)

For 2008, EBIT = 5,272, Tax rate = 39%

NOPAT = 5,272 * (1-0.39) = 3,215.92

b) Net operating assets are those assets and liablities which are directly related to its operations.

Net operating asset = total assets - total liabilities - financial asset + financial liabilities

Particulars	2008	2007
Total assets	44560	37349
Less : total liabilities	(29253)	(21716)
Less : construction in progress	(1852)	(1596)
Add : current portion of long term debt and notes payable	1964	1362
Add : long term debt	15126	8675
Net operating asset	$30545	$24074

c) Return on net operating asset = NOPAT/average NOA

= 3,215.92/{(30545+24074)/2}x100 = 11.78%.

NOPM = NOPAT/sales x100 = 3215.92/61471x100 = 5.23%.

NOAT = revenue / average NOA = 61471 /{(30545+24074)/2} = 2.25 times

d) Net non operating obligation = excess of non operating debt over investment.

Particulars	2008	2007
Current portion of long term debt and notes payable	1964	1362
Add : long term debt	15126	8675
Less : construction in progress	-1852	-1596
Net non operating obligation	18942	11633

e) Return on equity = net income / average shareholder investment

Return on equity = 2849 / {(15307+15633)/2} = 18.42%

f) Non operating Return component of ROE = ROE - RNOA = 18.42% - 11.78% = 6.64%

g) Note thst ROE>RNOA implied that target is able to borrow money to fund operating asset that yields a return greater than it's it's cost of debt and as a result the excess accrues to the benefit of target's stockholders . Thus , correct answer is (c)