Analysis and Interpretation of ROE and RNOA with No Noncontrolling Interest

Balance sheets and income statements for Nordstrom, Inc. follow. Refer to these financial statements to answer the requirements.

NORDSTROM, INC. Consolidated Statements of Earnings
For Fiscal Years Ended ($ millions)	2010	2009	2008
Sales	$ 8,258	$ 8,272	$ 8,828
Credit card revenues	369	301	252
Total revenues	8,627	8,573	9,080
Cost of sales and related buying and occupancy costs	(5,328)	(5,417)	(5,526)
Selling, general and administrative expenses
Retail	(2,109)	(2,103)	(2,130)
Credit	(356)	(274)	(177)
Earnings before interest and income taxes	834	779	1,247
Net interest expense	(138)	(131)	(74)
Earnings before income taxes	696	648	1,173
Income tax expense	(255)	(247)	(458)
Net earnings	$ 441	$ 401	$ 715

NORDSTROM, INC. Consolidated Balance Sheets
($ millions)	January 30, 2010	January 31, 2009
Assets
Current Assets
Cash and cash equivalents	$ 795	$ 72
Accounts receivable, net	2,035	1,942
Merchandise inventories	898	900
Current deferred tax assets, net	238	210
Prepaid expenses and other	88	93
Total current assets	4,054	3,217
Land, buildings and equipment, net	2,242	2,221
Goodwill	53	53
Other assets	230	170
Total assets	$ 6,579	$ 5,661
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable	$ 726	$ 563
Accrued salaries, wages and related benefits	336	214
Other current liabilities	596	525
Current portion of long-term debt	356	299
Total current liabilities	2,014	1,601
Long-term debt, net	2,257	2,214
Deferred property incentives, net	469	435
Other liabilities	267	201
Shareholders' equity
Common stock, no par value	1,066	997
Retained earnings	525	223
Accumulated other comprehensive income (loss)	(19)	(10)
Total shareholders' equity	1,572	1,210
Total liabilities and shareholders' equity	$ 6,579	$ 5,661

HINT: For Sales use "Total revenues" for your computations, when applicable.

(a) Compute net operating profit after tax (NOPAT) for 2010. Assume that the combined federal and statutory rate is: 37.0%. (Round your answer to the nearest whole number.) 2010 NOPAT = $Answer

(b) Compute net operating assets (NOA) for 2010 and 2009. 2010 NOA = $Answer

2009 NOA = $Answer

(c) Compute RNOA, net operating profit margin (NOPM), and net operating asset turnover (NOAT) for 2010. Do not use NOPM x NOAT to calculate RNOA. (Do not round until final answers. Round to two decimal places.) 2010 RNOA = Answer

% 2010 NOPM = Answer

% 2010 NOAT = Answer

(d) Compute net nonoperating obligations (NNO) for 2010 and 2009. 2010 NNO = $Answer

2009 NNO = $Answer

(e) Compute return on equity (ROE) for 2010. (Round your answers to two decimal places. Do not round until your final answer.) 2010 ROE = Answer

%

(f) Infer the nonoperating return component of ROE for 2010. (Use answers from above to calculate. Round your answer to two decimal places.) 2010 nonoperating return = Answer

%

(g) Comment on the difference between ROE and RNOA. Which of the following statements best describes the inference from the difference between Nordstrom's ROE and RNOA?

ROE>RNOA implies that Nordstrom's equity has grown faster than its NOA. The faster increase of equity compared to NOA allows higher dividends to be paid to Nordstrom's stockholders.

ROE>RNOA implies that Nordstrom 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 Nordstrom's stockholders.

ROE>RNOA implies that Nordstrom has taken on too much financial leverage. The high financial leverage results in a higher interest rate on Nordstrom's debt, therefore the cost of debt is greater.

ROE>RNOA implies that Nordstrom has increased its financial leverage during the period. The increase in financial leverage also increases Nordstrom's risk, therefore increasing the expected ROE by Nordstrom's stockholders.