E11.3. Reformulation and Analysis of Financial Statements (Medium) This exercise continues Exercise 9.5 in Chapter 9. The following financial statements were reported for a firm for fiscal year 2009 (in millions of dollars): Balance Sheet 2009 2008 2009 2008 Operating cash 60 50 Accounts payable 1,200 1,040 Short-term investments (at marke 550 500 Accrued bites 390 450 Accounts receivable 940 790 Long-term debt 1,840 1,970 Inventory 510 840 Property and plant 2,840 2,710 Common equity 1,870 1,430 5,300 4,890 5,300 4,850 Statement of Shareholders' Equity Balance, end of fiscal year 2008 Share Repurchase of 24 million shares Cash dividend Unrealized gain on debt investments Net income Balance, end of fiscal year 2009 1,430 822 (720) (180) 50 468 1,870 The firm's income tax rate is 35%. The firm reported $15 million in interest income and $98 million in interest expense for 2009. Sales revenue was $3,726 million.

a. Prepare a reformulated balance sheet and comprehensive income statement (as required in Exercise 9.5).

b. Calculate free cash flow for 2009.

c. Calculate the operating profit margin, asset turnover, and return on net operating assets for 2009. (For simplicity, use beginning-of-period balance sheet amounts in denominators.)

d. Calculate individual asset turnovers and show that they aggregate to the total asset turnover.

e. Show that the financing leverage equation holds for this firm: ROCE=RNOA+ (FLEV x Operating spread)

f. Calculate the after-tax net borrowing cost. If this bortowing cost were to be sustained in the future, what would the rate of return of common equity (ROCE) be if operating profitability (RNOA) fell to 6% and financial leverage decreased to 0.8? The implicit cost of credit for accounts payable and accrued liabilities is 3% (after tax). Show that the following leverage equation holds in this example: RNOA ROOA + [OLLEV x (ROOA-3.0%)]