Question
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
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.
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