Reformulating RNOA for Acquisition Gross Profit Effects Windstream Corporation, a communications and technology solutions company, acquired PAETEC Holding Corporation in 2011. The merger was designed to increase Windstream’s nationwide network with a more substantial fiber footprint. Use the selected financial statement and analysis data that follow to answer the requirements. Both net operating profit after tax (NOPAT) and average net operating assets

(NOA) are unadjusted for the effects of acquisition accounting.

$ millions PAETEC 2010 Windstream 2010 Windstream 2011 Sales revenue. . . . . . . . . . . . . . . . . . . . . . . . . . $1,624 $3,711 $ 4,286 Cost of goods or services sold . . . . . . . . . . . . 809 1,402 1,790 Depreciation and amortization expense. . . . . . 197 694 848 Property, plant and equipment (at cost) . . . . . . 1,514 11,254 12,763 Accumulated depreciation . . . . . . . . . . . . . . . . 654 6,490 7,055 Intangible assets (excluding goodwill and other indefinite-life intangibles). . . . . . . . . . . 280 2,039 2,685 Property, plant and equipment and finite-lived intangible asset acquisitions. . . . . . . . . . . . . — — 702 Net operating profit after tax (NOPAT) . . . . . . . 9654624 Average net operating assets (NOA) . . . . . . . . 1,231 6,844 10,035 Required

a. Compute 2010 pre-merger RNOA for Windstream and PAETEC.

b. Compute the unadjusted 2011 RNOA for the combined company.

c. Determine what adjustments can be made to 2011 NOPAT to remove the following effects from consolidation accounting rules.

• Gross profit effects related to writing up PAETEC’s inventory and deferred revenue contracts to fair market value at the acquisition date.

• Depreciation and amortization effects resulting from writing up PAETEC’s fixed and finite-lived intangible assets to fair market value at the acquisition date.

d. Compute fully adjusted 2011 RNOA for the combined company. Comment on any differences between the adjusted and unadjusted RNOA.