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

Current Assets

Cash and cash equivalents $ 1,849 $ 1,896

Marketable securities-current 373 579

Accounts receivable-net 3,195 3,362

Inventories

Finished goods 1,505 1,349

Work in process 851 880

Raw materials and supplies 657 623

Total inventories 3,013 2,852

Other current assets 1,168 1,149

Total current assets 9,598 9,838

Marketable securities-noncurrent 352 480

Investments 111 298

Property, plant and equipment 18,812 18,390

Less: Accumulated depreciation (11,926) (11,808)

Property, plant and equipment-net 6,886 6,582

Goodwill 5,753 4,589

Intangible assets-net 1,398 801

Prepaid pension benefits 36 1,378

Other assets 1,659 728

Total assets $ 25,793 $ 24,694

Liabilities

Current liabilities

Short-term borrowings and current portion of long-term debt $ 1,552 $ 901

Accounts payable 1,301 1,505

Accrued payroll 644 580

Accrued income taxes 350 543

Other current liabilities 1,992 1,833

Total current liabilities 5,839 5,362

Long-term debt 5,166 4,019

Pension and postretirement benefits 2,847 --

Other liabilities 1,637 3,566

Total liabilities 15,489 12,947

Equity

3M Company shareholders' equity 9 9

Additional paid-in capital 3,006 2,785

Retained earnings 22,227 20,316

Treasury stock (11,676) (10,520)

Accumulated other comprehensive income (loss) (3,686) (843)

Total 3M Company shareholders' equity 9,880 11,747

Noncontrolling interest 424 --

Total equity 10,304 11,747

Total liabilities and equity $ 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 =Answer

($ millions)

(b) Compute net operating assets (NOA) for 2008 and 2007. Treat noncurrent Investments as a nonoperating item.

2008 NOA =Answer

($ millions)

2007 NOA =Answer

($ 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 =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) What is the nonoperating return component of ROE for 2008? (Round your answers 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 3M's ROE and RNOA?

ROE > RNOA implies that 3M has taken on too much financial leverage.

ROE > RNOA implies that 3M is able to borrow money to fund operating assets that yield a return greater than its cost of debt.

ROE > RNOA implies that 3M's equity has grown faster than its NOA.

ROE > RNOA implies that 3M has increased its financial leverage during the period.