Question
Analysis and Interpretation of Profitability Balance sheets and income statements for 3M Company follow. Consolidated Statements of Income Years ended December 31 ($ millions) 2007
Analysis and Interpretation of Profitability Balance sheets and income statements for 3M Company follow.
Consolidated Statements of Income | |||
---|---|---|---|
Years ended December 31 ($ millions) | 2007 | 2006 | 2005 |
Net sales | $24,462 | $22,923 | $21,167 |
Operating expenses | |||
Cost of sales | 12,735 | 11,713 | 10,408 |
Selling, general and administrative expenses | 5,015 | 5,066 | 4,631 |
Research, development and related expenses | 1,368 | 1,522 | 1,274 |
Loss/(gain) from sale of business | (849) | (1,074) | -- |
Total operating expenses | 18,269 | 17,227 | 16,313 |
Operating income | 6,193 | 5,696 | 4,854 |
Interest expenses and income | |||
Interest expense | 210 | 122 | 82 |
Interest income | (132) | (51) | (56) |
Total interest expense | 78 | 71 | 26 |
Income before income taxes | 6,115 | 5,625 | 4,828 |
Provision for income taxes | 1,964 | 1,723 | 1,627 |
Net income including noncontrolling interest | 4,151 | 3,902 | 3,201 |
Less: Net income attributable to noncontrolling interest | 55 | 51 | 55 |
Net income | $ 4,096 | $ 3,851 | $ 3,146 |
Consolidated Balance Sheets | ||
---|---|---|
($ millions) | 2007 | 2006 |
Assets | ||
Current Assets | ||
Cash and cash equivalents | $ 1,896 | $ 1,447 |
Marketable securities-current | 579 | 471 |
Accounts receivable-net | 3,362 | 3,102 |
Inventories | ||
Finished goods | 1,349 | 1,235 |
Work in process | 880 | 795 |
Raw materials and supplies | 623 | 571 |
Total inventories | 2,852 | 2,601 |
Other current assets | 1,149 | 1,325 |
Total current assets | 9,838 | 8,946 |
Marketable securities-noncurrent | 480 | 166 |
Investments | 298 | 314 |
Property, plant and equipment | 18,390 | 17,017 |
Less: Accumulated depreciation | (11,808) | (11,110) |
Property, plant and equipment-net | 6,582 | 5,907 |
Goodwill | 4,589 | 4,082 |
Intangible assets-net | 801 | 708 |
Prepaid pension benefits | 1,378 | 395 |
Other assets | 728 | 776 |
Total assets | $ 24,694 | $ 21,294 |
Liabilities | ||
Current liabilities | ||
Short-term borrowings and current portion of long-term debt | $ 901 | $ 2,506 |
Accounts payable | 1,505 | 1,402 |
Accrued payroll | 580 | 520 |
Accrued income taxes | 543 | 1,134 |
Other current liabilities | 1,833 | 1,761 |
Total current liabilities | 5,362 | 7,323 |
Long-term debt | 4,019 | 1,047 |
Pension and postretirement benefits | -- | -- |
Other liabilities | 3,566 | 2,965 |
Total liabilities | 12,947 | 11,335 |
Equity | ||
3M Company shareholders' equity | 9 | 9 |
Additional paid-in capital | 2,785 | 2,484 |
Retained earnings | 20,316 | 17,933 |
Treasury stock | (10,520) | (8,456) |
Accumulated other comprehensive income (loss) | (843) | (2,011) |
Total 3M Company shareholders' equity | 11,747 | 9,959 |
Noncontrolling interest | -- | -- |
Total equity | 11,747 | 9,959 |
Total liabilities and equity | $ 24,694 | $ 21,294 |
(a) Compute net operating profit after tax (NOPAT) for 2007. Assume that the combined federal and statutory rate is: 35.9% (Round your answer to the nearest whole number.) 2007 NOPAT =Answer($ millions) (b) Compute net operating assets (NOA) for 2007 and 2006. Treat noncurrent Investments as a nonoperating item. 2007 NOA =Answer($ millions) 2006 NOA =Answer($ millions) (c) Compute 3M's RNOA, net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2007. (Round your answers to two decimal places. Do not round until your final answer. Do not use NOPM x NOAT to calculate RNOA.)
2007 RNOA =Answer% 2007 NOPM =Answer% 2007 NOAT =Answer (d) Compute net nonoperating obligations (NNO) for 2007 and 2006. 2007 NNO =Answer($ millions) 2006 NNO =Answer($ millions) (e) Compute return on equity (ROE) for 2007. (Round your answers to two decimal places. Do not round until your final answer.) 2007 ROE =Answer% (f) What is the nonoperating return component of ROE for 2007? (Round your answers to two decimal places.) Hint: Use your prior rounded answers to compute this answer. 2007 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.
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