Analysis and Interpretation of Profitability Balance sheets and income statements for 3M Company follow. Consolidated Statements of Income Years ended December 31 ($ millions) 2008 2007 2006 Net sales $25,269 $24,462 $22,923 Operating expenses Cost of sales 13,379 12,735 11,713 Selling, general and administrative expenses 5,245 5,015 5,066 Research, development and related expenses 1,404 1,368 1,522 Loss/(gain) from sale of business 23 (849) (1,074) Total operating expenses 20,051 18,269 17,227 Operating income 5,218 6,193 5,969 Interest expenses and income Interest expense 215 210 122 Interest income (105) (132) (51) Total interest expense 110 78 71 Income before income taxes 5,108 6,115 5,625 Provision for income taxes 1,588 1,964 1,723 Net income including noncontrolling interest 3,520 4,151 3,902 Less: Net income attributable to noncontrolling interest 60 55 51 Net income $ 3,460 $ 4,096 $3,851 Consolidated Balance Sheets ($ millions) 2008 2007 Assets $ 1,896 $ 1,849 373 579 3,195 3,362 Current Assets Cash and cash equivalents Marketable securities-current Accounts receivable-net Inventories Finished goods Work in process Raw materials and supplies Total inventories 1,505 1,349 851 880 657 623 Other current assets Total current assets Marketable securities-noncurrent 3,013 1,168 9,598 2,852 1,149 9,838 480 352 Investments 111 298 Property, plant and equipment Less: Accumulated depreciation Property, plant and equipment-net Goodwill Intangible assets-net Prepaid pension benefits Other assets Total assets 18,812 18,390 (11,926) (11,808) 6,886 6,582 5,753 4,589 1,398 801 36 1,378 1,659 728 $ 25,793 $ 24,694 Liabilities Total assets $ 25,793 $ 24,694 $ 901 $ 1,552 1,301 644 350 1,505 580 543 1,833 5,362 4,019 Liabilities Current liabilities Short-term borrowings and current portion of long-term debt Accounts payable Accrued payroll Accrued income taxes Other current liabilities Total current liabilities Long-term debt Pension and postretirement benefits Other liabilities Total liabilities Equity 3M Company shareholders' equity Additional paid-in capital Retained earnings Treasury stock Accumulated other comprehensive income (loss) Total 3M Company shareholders' equity Noncontrolling interest Total equity Total liabilities and equity 1,992 5,839 5,166 2,847 1,637 15,489 3,566 12,947 9 9 3,006 2,785 22,227 20,316 (11,676) (10,520) (3,686) (843) 9,880 11,747 424 10,304 11,747 $ 25,793 $ 24,694 (a) Compute net operating profit after tax (NOPAT) for 2008. Assume that the combined federal and statutory rate is: 35.9% (Round your answer to the nearest whole number.) 2008 NOPAT = 0 ($ millions) (b) Compute net operating assets (NOA) for 2008 and 2007. Treat noncurrent Investments as a nonoperating item. 2008 NOA = 0 ($ millions) 2007 NOA = 0 ($ millions) (C) Compute 3M's RNOA, net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2008. (Round your answers to two decimal places. Do not round until your final answer. Do not use NOPM x NOAT to calculate RNOA.) 2008 RNOA = 0 % 2008 NOPM = 0 % 2008 NOAT = 0 (d) Compute net nonoperating obligations (NNO) for 2008 and 2007. 2008 NNO = 0 ($ millions) 2007 NNO = 0 ($ 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 = 0 % (f) What is the nonoperating return component of ROE for 2008? (Round your answers to two decimal places.) 2008 nonoperating return = 0 % (g) Which of the following statements reflects the best inference we can draw from the difference between 3M's ROE and RNOA? OROE > RNOA implies that 3M has taken on too much financial leverage. OROE > RNOA implies that 3M is able to borrow money to fund operating assets that yield a return greater than its cost of debt. OROE > RNOA implies that 3M's equity has grown faster than its NOA. OROE > RNOA implies that 3M has increased its financial leverage during the period
