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	$350	$322

3M COMPANY
Consolidated Balance Sheets
At December 31 ($ millions, except per share amount)	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
3M Company shareholders' equity
Common stock, par value	9	9
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
Combined federal and state statutory tax rate	22.00%
ROE	50.09%
RNOA	25.89%

a. Compute net nonoperating expense (NNE) and net operating profit after tax (NOPAT). Assume a tax rate of 22%.

	NNE
	Answer 1

	NOPAT
	Answer 2

b. Compute net nonoperating obligations (NNO).

	Year	NNO
	2018	Answer 3
	2017	Answer 4

c. Compute financial leverage (FLEV).

	Numerator	Denominator	FLEV
	Answer 5Net salesTax 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)	Answer 6Net salesTax 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)
	Answer 7	Answer 8

d. Compute NNEP and Spread.

	Numerator	Denominator	NNEP
	Answer 9Net salesTax 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)	Answer 10Net salesTax 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)
	Answer 11	Answer 12

	RNOA (given)	NNEP	Spread
	Answer 13	Answer 14

e. Compute the noncontrolling interest ratio (NCI ratio).

	Numerator	Denominator	NCI ratio
	Answer 15	Answer 16

f. Confirm the relation: ROE = [RNOA + (FLEV Spread)] NCI ratio.

	Ratio	Number
	ROE (given)	Answer 17
	RNOA (given)	Answer 18
	FLEV	Answer 19
	Spread	Answer 20 Correct Mark 1.00 out of 1.00
	NCI ratio	Answer 21
	ROE