Refer to the financial information of Kraft Foods Group, Inc, in P4-44 to answer the following requirements.

Required

a. Assume that 2012 net nonoperating expenses (NNE) are \(\$ 137\) million and that 2012 RNOA is 12.18\%. Compute financial leverage (FLEV) and Spread for 2012.

b. Assume that 2012 return on equity (ROE) is \(16.29 \%\). Confirm computations to yield the relation: \(\mathrm{ROE}=\mathrm{RNOA}+(\mathrm{FLEV} \times\) Spread \()\).

\(c\). What do your computations of the nonoperating return in parts \(a\) and \(b\) imply about the company's use of borrowed funds?

Q4-44

Balance sheets and income statements for Kraft Foods Group, Inc, follow. Refer to these financial statements to answer the following requirements.

Required

a. Compute net operating profit after tax (NOPAT) for 2012. Assume that the combined federal and state statutory tax rate is \(37 \%\).

b. Compute net operating assets (NOA) for 2012 and 2011.

c. Compute RNOA and disaggregate it into net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2012; confirm that RNOA = NOPM \(\times\) NOAT. The median NOPM and NOAT for companies in the packaged food industry (see Exhibit 4.4) is 5\% and 2.1, respectively, yielding a median RNOA of \(10.5 \%\). Comment on NOPM and NOAT estimates for KFT in comparison to industry medians.

d. Compute net nonoperating obligations (NNO) for 2012 and 2011. Confirm the relation: NOA \(=\) NNO + Stockholders' equity.

e. Compute return on equity (ROE) for 2012.
f. Infer the nonoperating return component of ROE for 2012.
g. Comment on the difference between ROE and RNOA. What does this relation suggest about Kraft's use of debt?
Kraft Foods Group, Inc. (KFT)
Abbott Laboratories (ABT) FedEx Corp. (FDX) CVS Caremark Corp. (CVS) Kraft Foods Group, Inc. (KFT) Walgreen Co. (WAG) Caterpillar, Inc. (CAT) Target Corp. (TGT)

Transcribed Image Text:

For Fiscal Years Ended (In millions) Net revenues... Cost of sales.. KRAFT FOODS GROUP, INC. Income Statements Gross profit... Selling, general and administrative expenses Asset impairment and exit costs.. Operating income.... Interest and other expense, net.. Royalty income from Mondelez International.. Earnings from continuing operations before income taxes Provision for income taxes..... Earnings from continuing operations .... Earnings and gain from discontinued operations, net of income taxes. Net earnings..... 2012 2011 2010 $18,339 $18,655 $17,797 12,499 12,813 11,777 5,840 3,029 141 2,453 5,842 2,670 2,828 (258) 41 811 1,642 3,016 (2) (7) 55 2,876 1,101 1,775 6,020 3,063 (8) 2,965 (6) 43 3,002 1,112 1,890 1,644 $1,642 $1,775 $3,534