Direct Computation of Nonoperating Return Balance sheets and income statements for 3M Company follow. 3M COMPANY Consolidated Statements of Income For Years Ended December 31 ($ millions) 2018 2017 Net sales $32,765 $31,657 Operating expenses Cost of sales 16,682 16,055 Selling, general and administrative expenses 7,602 6,626 Research, development and related expenses 1,821 1,870 Gain on sale of businesses (547) (586) Total operating expenses 25,558 23,965 Operating income 7,207 7,692 Other expense, net* 207 144 Income before income taxes 7,000 7,548 Provision for income taxes 1,637 2,679 Net income including noncontrolling interest 5,363 4,869 Less: Net income attributable to noncontrolling interest 14 11 Net income attributable to 3M $5,349 $4,858 Interest expense, gross is $350 million in 2018 and $322 million in 2017. 3M COMPANY Consolidated Balance Sheets At December 31 ($ millions) 2018 2017 Current assets Cash and cash equivalents $2,853 $3,053 Marketable securities 380 1,076 Accounts receivable 5,020 4,911 Total inventories 4,366 4,034 Prepaids 741 937 Other current assets 349 266 Total current assets 13,709 14,277 Property, plant and equipment, net 8,738 8,866 Goodwill 10,051 10,513 Intangible assets-net 2,657 2,936 Other assets 1,345 1,395 Total assets $36,500 $37,987 Current liabilities Short-term borrowings and current portion of long-term debt $1,211 $1,853 Accounts payable 2,266 1,945 Accrued payroll 749 870 Accrued income taxes 243 310 Other current liabilities 2,775 2,709 Total current liabilities 7,244 7,687 Long-term debt 13,411 12,096 Pension and postretirement benefits 2,987 3,620 Other liabilities 3,010 2,962 Total liabilities $26,652 $26,365 9 9 3M Company shareholders' equity Common stock par value Additional paid-in capital 5,643 5,352 Retained earnings 40,636 39,115 Treasury stock (29,626) (25,887) Accumulated other comprehensive income (loss) (6,866) (7,026) Total 3M Company shareholders' equity 9,796 11,563 Noncontrolling interest 52 59 Total equity 9,848 11,622 Total liabilities and equity $36,500 $37,987 In 2018, 3M's return on equity (ROE) is 50.09% and its return on net operating assets (RNOA) is 25.89%. Required a. Compute net nonoperating expense (NNE) and net operating profit after tax (NOPAT). Assume a tax rate of 22%. Note: Round answers to the nearest million. 2018 NNE: $ x million 2018 NOPAT: $ 5,524 million b. Compute net nonoperating obligations (NNO). 2018 NNO: $ 0 * million 2017 NNO: $ * million C. Compute financial leverage (FLEV). Note: Round your answer to three decimal places (for example, enter 6.776 for 6.77555). 0 d. Compute NNEP and Spread. Note: Round percentages to two decimal places (for example, enter 6.66% for 6.6555%). NNEP: 0 X % Spread: 0 * % e. Compute the noncontrolling interest ratio (NCI ratio). Note: Round your answers to four decimal places (for example, enter 6.7756 for 6.775555). NCT ratio: 0 X f. Confirm the relation: ROE = [RNOA + (FLEV * Spread)] * NCI ratio. Note: For FLEV, round amount to three decimal places (for example, enter 6.776 for 6.775555). Note: For RNOA and Spread round percentages to two decimal places (for example, enter 6.66% for 6.6555%). Note: Round NCI ratio, round amount to four decimal places (for example, enter 1.7756 for 1.77555). Note: Round ROE to the nearest whole percentage. RNOA ROE + FLEV 0% x + x Spread NCI Ratio 0% x x OX) = 0% * Check Direct Computation of Nonoperating Return Balance sheets and income statements for 3M Company follow. 3M COMPANY Consolidated Statements of Income For Years Ended December 31 ($ millions) 2018 2017 Net sales $32,765 $31,657 Operating expenses Cost of sales 16,682 16,055 Selling, general and administrative expenses 7,602 6,626 Research, development and related expenses 1,821 1,870 Gain on sale of businesses (547) (586) Total operating expenses 25,558 23,965 Operating income 7,207 7,692 Other expense, net* 207 144 Income before income taxes 7,000 7,548 Provision for income taxes 1,637 2,679 Net income including noncontrolling interest 5,363 4,869 Less: Net income attributable to noncontrolling interest 14 11 Net income attributable to 3M $5,349 $4,858 Interest expense, gross is $350 million in 2018 and $322 million in 2017. 3M COMPANY Consolidated Balance Sheets At December 31 ($ millions) 2018 2017 Current assets Cash and cash equivalents $2,853 $3,053 Marketable securities 380 1,076 Accounts receivable 5,020 4,911 Total inventories 4,366 4,034 Prepaids 741 937 Other current assets 349 266 Total current assets 13,709 14,277 Property, plant and equipment, net 8,738 8,866 Goodwill 10,051 10,513 Intangible assets-net 2,657 2,936 Other assets 1,345 1,395 Total assets $36,500 $37,987 Current liabilities Short-term borrowings and current portion of long-term debt $1,211 $1,853 Accounts payable 2,266 1,945 Accrued payroll 749 870 Accrued income taxes 243 310 Other current liabilities 2,775 2,709 Total current liabilities 7,244 7,687 Long-term debt 13,411 12,096 Pension and postretirement benefits 2,987 3,620 Other liabilities 3,010 2,962 Total liabilities $26,652 $26,365 9 9 3M Company shareholders' equity Common stock par value Additional paid-in capital 5,643 5,352 Retained earnings 40,636 39,115 Treasury stock (29,626) (25,887) Accumulated other comprehensive income (loss) (6,866) (7,026) Total 3M Company shareholders' equity 9,796 11,563 Noncontrolling interest 52 59 Total equity 9,848 11,622 Total liabilities and equity $36,500 $37,987 In 2018, 3M's return on equity (ROE) is 50.09% and its return on net operating assets (RNOA) is 25.89%. Required a. Compute net nonoperating expense (NNE) and net operating profit after tax (NOPAT). Assume a tax rate of 22%. Note: Round answers to the nearest million. 2018 NNE: $ x million 2018 NOPAT: $ 5,524 million b. Compute net nonoperating obligations (NNO). 2018 NNO: $ 0 * million 2017 NNO: $ * million C. Compute financial leverage (FLEV). Note: Round your answer to three decimal places (for example, enter 6.776 for 6.77555). 0 d. Compute NNEP and Spread. Note: Round percentages to two decimal places (for example, enter 6.66% for 6.6555%). NNEP: 0 X % Spread: 0 * % e. Compute the noncontrolling interest ratio (NCI ratio). Note: Round your answers to four decimal places (for example, enter 6.7756 for 6.775555). NCT ratio: 0 X f. Confirm the relation: ROE = [RNOA + (FLEV * Spread)] * NCI ratio. Note: For FLEV, round amount to three decimal places (for example, enter 6.776 for 6.775555). Note: For RNOA and Spread round percentages to two decimal places (for example, enter 6.66% for 6.6555%). Note: Round NCI ratio, round amount to four decimal places (for example, enter 1.7756 for 1.77555). Note: Round ROE to the nearest whole percentage. RNOA ROE + FLEV 0% x + x Spread NCI Ratio 0% x x OX) = 0% * Check