Analysis and Interpretation of Ratios When RNOA Exceeds ROE Refer to the balance sheets and income statement below for Facebook Inc FACEBOOK INC Consolidated Statement of Income For Year Ended December 31, $ millions 2018 Revenue $55,838 Costs and expenses Cost of revenue 9,355 Research and development 10,273 Marketing and sales 7,846 General and administrative 3,451 Total costs and expenses 30,925 Income from operations 24,913 Interest and other income (expense), net 448 Income before provision for income taxes 25,361 Provision for income taxes 3,249 Net income $22,112 FACEBOOK INC Consolidated Balance Sheet At December 31, $ millions 2018 2017 Current assets Cash and cash equivalents $10,019 $8,079 Marketable securities 31,095 33,632 Accounts receivable, net 7,587 5,832 Prepaid expenses and other current assets 1,779 1,020 Total current assets 50,480 48,563 Property and equipment, net 24,683 13,721 Intangible assets, net 1,294 1,884 Goodwill 18,301 18,221 Other assets 2,576 2,135 Total assets $97,334 $84,524 Current liabilities Accounts payable $820 $380 Partners payable 541 390 Accrued expenses and other current liabilities 5,509 2,892 Deferred revenue and deposits 147 98 Total current liabilities 7,017 3,760 Other liabilities 6,190 6,417 Total liabilities 13,207 10,177 Stockholders' equity Common stock and additional paid in capital 42,906 40,584 Accumulated other comprehensive loss (760) (227) Retained earnings 41,981 33,990 Total stockholders' equity 84,127 74,347 Total liabilities and stockholders' equity $97,334 $84,524 Combined federal and state statutory tax rate 22 a Compute net operating profit after tax (NOPAT) for 2018 Assume that the combined federal and state statutory tax rate is 22 Hint Carefully consider whether nonoperating expense is positive or negative NOPAT b Compute net operating assets (NOA) for 2018 and 2017 Year NOA 2018 2017 c Compute RNOA and disaggregate it into net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2018 Numerator Denominator RNOA RevenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO) RevenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO) Numerator Denominator NOPM RevenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO) RevenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO) Numerator Denominator NOAT RevenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO) RevenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO) d Compute return on equity (ROE) for 2018 Numerator Denominator ROE RevenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO) RevenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO)

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Analysis and Interpretation of Ratios When RNOA Exceeds ROE Refer to the balance sheets and income statement below for Facebook Inc. FACEBOOK INC. Consolidated Statement

Analysis and Interpretation of Ratios When RNOA Exceeds ROE

Refer to the balance sheets and income statement below for Facebook Inc.

FACEBOOK INC.
Consolidated Statement of Income
For Year Ended December 31, $ millions	2018
Revenue	$55,838
Costs and expenses
Cost of revenue	9,355
Research and development	10,273
Marketing and sales	7,846
General and administrative	3,451
Total costs and expenses	30,925
Income from operations	24,913
Interest and other income (expense), net	448
Income before provision for income taxes	25,361
Provision for income taxes	3,249
Net income	$22,112

FACEBOOK INC.
Consolidated Balance Sheet
At December 31, $ millions	2018	2017
Current assets
Cash and cash equivalents	$10,019	$8,079
Marketable securities	31,095	33,632
Accounts receivable, net	7,587	5,832
Prepaid expenses and other current assets	1,779	1,020
Total current assets	50,480	48,563
Property and equipment, net	24,683	13,721
Intangible assets, net	1,294	1,884
Goodwill	18,301	18,221
Other assets	2,576	2,135
Total assets	$97,334	$84,524
Current liabilities
Accounts payable	$820	$380
Partners payable	541	390
Accrued expenses and other current liabilities	5,509	2,892
Deferred revenue and deposits	147	98
Total current liabilities	7,017	3,760
Other liabilities	6,190	6,417
Total liabilities	13,207	10,177
Stockholders' equity
Common stock and additional paid-in capital	42,906	40,584
Accumulated other comprehensive loss	(760)	(227)
Retained earnings	41,981	33,990
Total stockholders' equity	84,127	74,347
Total liabilities and stockholders' equity	$97,334	$84,524
Combined federal and state statutory tax rate	22%

a. Compute net operating profit after tax (NOPAT) for 2018. Assume that the combined federal and state statutory tax rate is 22%. Hint: Carefully consider whether nonoperating expense is positive or negative.

	NOPAT

b. Compute net operating assets (NOA) for 2018 and 2017.

	Year	NOA
	2018
	2017

c. Compute RNOA and disaggregate it into net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2018.

	Numerator	Denominator	RNOA
	RevenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO)	RevenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO)

	Numerator	Denominator	NOPM
	RevenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO)	RevenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO)

	Numerator	Denominator	NOAT
	RevenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO)	RevenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO)

d. Compute return on equity (ROE) for 2018.

	Numerator	Denominator	ROE
	RevenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO)	RevenueTax expenseInterest expense netNet incomeNet income (adjusted)NOPATNet nonoperating expense (NNE)Average assetsAverage equityAverage operating assetsAverage nonoperating assetsAverage operating liabilitiesAverage nonoperating liabilitiesAverage net operating assets (NOA)Average net nonoperating obligations (NNO)