Analysis and Interpretation of Profitability Balance sheets and income statements for Target Corporation follow. Income Statement For Fiscal Years Ended ($ millions) 2006 2005 2004 Sales $ 51,271 $ 45,682 $ 40,928 Credit card revenues 1,349 1,157 1,097 Total revenues 52,620 46,839 42,025 Cost of sales 34,927 31,445 28,389 Selling, general and administrative expenses 11,185 9,797 8,657 Credit card expenses 776 737 722 Depreciation and amortization 1,409 1,259 1,098 Earnings before interest and income taxes 4,323 3,601 3,159 Net interest expense 463 570 556 Earnings before income taxes 3,860 3,031 2,603 Provisions for income taxes 1,452 1,146 984 Net earnings $ 2,408 $ 1,885 $ 1,619 Balance Sheet ($ millions, except footnotes) January 28, 2006 January 29, 2005 Assets Cash and cash equivalents $ 1,648 $ 2,245 Credit card receivables 5,666 5,069 Inventory 5,838 5,384 Other current assets 1,253 1,224 Total current assets 14,405 13,922 Property and equipment Land 4,449 3,804 Buildings and improvements 14,174 12,518 Fixtures and equipment 3,219 2,990 Computer hardware and software 2.214 1,998 Construction-in-progress 1,158 962 Accumulated depreciation (6,176) (5,412) Property and equipment, net 19,038 16,860 Other noncurrent assets 1.552 1.511 Total assets $ 34,995 Liabilities and shareholders' investment $ 32,293 Accounts payable $ 6.268 Accrued and other current liabilities $ 5.770 12,518 2,990 14,174 3,219 2,214 1,158 (6,176) 19,038 1,552 $ 34,995 1.998 962 (5,412) 16,860 1,511 $ 32,293 Buildings and improvements Fixtures and equipment Computer hardware and software Construction-in-progress Accumulated depreciation Property and equipment, net Other noncurrent assets Total assets Liabilities and shareholders' investment Accounts payable Accrued and other current liabilities Current portion of long-term debt and notes payable Total current liabilities Long-term debt Deferred income taxes Other noncurrent liabilities Shareholders' investment Common stock Additional paid-in-capital Retained earnings Accumulated other comprehensive income (loss) Total shareholders' investment Total liabilities and shareholders equity $ 6,268 2,567 753 9,588 9,119 $ 5,779 1,937 504 8,220 9,034 851 973 1.232 1,037 74 73 2.121 12.013 (2) 14,205 1,810 11,148 (3) 13,029 $ 34,995 $ 32,293 HINT: For Sales use "Total revenues for your computations, when applicable. (a) Compute net operating profit after tax (NOPAT) for 2006. Assume that the combined federal and statutory rate is: 38.3%. (Round your answer to the nearest whole number.) 2006 NOPAT-50 million (b) Compute net operating assets (NOA) for 2006 and 2005 2006 NOA =50 million 2005 NOA-50 million godding (c) Compute Target's RNOA, net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2006. (Do not round until final answer. Round two decimal places. Do not use NOPM x NOAT to calculate RNOA) 2006 RNOA 2006 NOPM = 0 96 2006 NOAT0 (d) Compute net nonoperating obligations (NNO) for 2006 and 2005 2006 NNO -50 million 2005 NNO 50 million (d) Compute net nonoperating obligations (NNO) for 2006 and 2005. 2006 NNO 5 0 million 2005 NNO - $ 0 million (e) Compute return on equity (ROE) for 2006. (Do not round until final answer. Round answer two decimal places.) 2006 ROE in Infer the nonoperating return component of ROE for 2006. (Use answers from above to calculate. Round your answer to two decimal places.) 2006 nonoperating return - 0 (g) Which of the following statements reflects the best inference we can draw from the difference between Target's ROE and RNOA? CROERNOA implies that Target's equity has grown faster than its NOA CROERNOA implies that Target has taken on too much financial leverage. CROERNOA implies that Target is able to borrow money to fund operating assets that yield a return greater than its cost of debt; the excess accrues to the benefit of Target's stockholders CROERNOA implies that Target has increased its financial leverage during the period