Analysis and Interpretation of Profitability Balance sheets and income statements for 3M Company follow. Consolidated Statements of Income Years ended December 31 ($ millions) 2006 2005 2004 Net sales $22.923 $ 21,167 $ 20,011 Operating expenses Cost of sales 11,713 10,408 10,002 Selling, general and administrative expenses 5,066 4,631 4,437 Research, development and related expenses 1,522 1.274 1.246 Loss/(gain) from sale of business (1.074) Total operating expenses 17.227 16,313 15,685 Operating income 5.696 4,854 4.326 Interest expenses and income Interest expense 122 82 69 Interest income (51) (56) (46) Total interest expense 71 26 23 Income before income taxes 5.625 4.828 4303 Provision for income taxes 1.723 1,627 1,400 Net income including noncontrolling interest 3,902 3.201 2.903 Less: Netincome attributable to noncontrolling interest 55 62 Net income 53.851 $ 3.146 $2,841 51 Consolidated Balance Sheets (5 millions) 2006 2005 Assets x Consolidated Balance Sheets (5 millions) 2006 2005 Assets $ 1,447 $ 1,072 471 3.102 2.838 Current Assets Cash and cash equivalents Marketable securities-current Accounts receivable-net Inventories Finished goods Work in process Raw materials and supplies Total inventories Other current assets Total current assets Marketable securities-noncurrent Investments Property, plant and equipment Less: Accumulated depreciation Property, plant and equipment.net Goodwill Intangible assets.net Prepaid pension benefits Other assets Total assets Liabilities Current liabilities 1.235 1,050 795 706 571 406 2.601 2.162 1,325 1,043 8.946 7.115 166 314 272 17,017 16,127 (11.110) (10.534) 5.907 5,593 4,082 3,530 708 486 395 2.905 776 640 5.21.294 5 20.541 ORCIDCO Total assets $ 21.294 $20,541 $ 2,506 $ 1,072 1,402 1,256 520 469 1.134 989 1.761 7,323 1,452 5.238 1.309 1.047 2.965 3,599 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: Common stock, par value 5.01 per share Additional paid-in capital Retained earnings Treasury stock Accumulated other comprehensive income foss) Total BM Company shareholders' equity Noncontrolling interest Total equity Total liabilities and equity 11.335 10,146 9 9 2.484 2.225 17,933 15,715 (8.456) (6,965) (2.011) (589) 9.959 10,395 9.959 10,395 $ 21.294 $20,541 (a) Compute net operating profit after tax (NOPATY for 2006. Assume that the combined federal and number (a) Compute net operating profit after tax (NOPAT) for 2006. Assume that the combined federal and statutory rate is: 36.0% (Round your answer to the nearest whole number) 2006 NOPATO (5 millions) (b) Compute net operating assets (NOA) for 2006 and 2005. Treat noncurrent Investments as a nonoperating item 2006 NOA 0 ($ millions) 2005 NOA= 0 (5 millions) (Compute M's RNOA net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2006. (Bound your answers to two decimal places. Do not round until your final answer. Do not use NOPMX NOAT to calculate RNOA 2006 RNOA 0 2006 NOPM0 2006 NOATO Idi Compute net nonoperating obligations (NNO) for 2006 and 2005 2006 NNO 0 (5 millions) 2005 NNO 5 millions (d) Compute net nonoperating obligations (NNO) for 2006 and 2005. 2006 NNO = 0 (5 millions) 2005 NNO = 0 (5 millions) te) Compute return on equity (ROE) for 2006. (Round your answers to two decimal places. Do not round until your final answer.) 2006 ROE= What is the nonoperating return component of ROE for 2006? (Round your answers to two decimal places.) 2006 nonoperating retum = 0 (g) Which of the following statements reflects the best inference we can draw from the difference between 3M'S ROE and RNOA CROE > RNOA Implies that 3M has taken on too much financial leverage. OROERNOA implies that 3M is able to borrow money to fund operating assets that yield a return greater than ts cost of debt. CROERNOA Implies that 3Ms equity has grown faster than its NOA OROE > RNOA implies that 3M has increased its financial leverage during the period