Direct Computation of Nonoperating Return

Balance sheets and income statements for Best Buy Co., Inc. follow.

Consolidated Statements of EarningsFor Fiscal Years Ended ($ millions)February 26, 2011February 27, 2010February 28, 2009Revenue$ 50,272$ 49,694$ 45,015Cost of goods sold37,61137,53434,017Restructuring charges - cost of goods sold24----Gross Profit12,63712,16010,998Selling, general and administrative expenses10,3259,8738,984Restructuring charges1985278Goodwill and tradename impairment----66Operating income2,1142,2351,870Other income (expense)Investment income and other515435Investment impairment----(111)Interest expense(87)(94)(94)Earnings before income tax expense and equity in income of affiliates2,0782,1951,700Income tax expense714802674Equity in income of affiliates217Net earnings including noncontrolling interest1,3661,3941,033Net income attributable to noncontrolling interest(89)(77)(30)Net income attributable to Best Buy Co., Inc.$ 1,277$ 1,317$ 1,003

Consolidated Balance Sheets($ millions, except footnotes)February 26, 2011February 27, 2010AssetsCurrent assetsCash and cash equivalents$ 1,103$ 1,826Short-term investments2290Receivables2,3482,020Merchandise inventories5,8975,486Other current assets1,1031,144Total current assets10,47310,566Property and equipmentLand and buildings766757Leasehold improvements2,3182,154Fixtures and equipment4,7014,447Property under capital lease120957,9057,453Less: Accumulated depreciation4,0823,383Property and equipment, net3,8234,070Goodwill2,4542,452Tradenames, net133159Customer relationships, net203279Equity and other investments328324Other noncurrent assets435452Total assets$ 17,849$ 18,302Liabilities and equityCurrent liabilitiesAccounts payable$ 4,894$ 5,276Unredeemed gift card liabilities474463Accrued compensation and related expenses570544Accrued liabilities1,4711,681Accrued income taxes256316Short-term debt557663Current portion of long-term debt44135Total current liabilities8,6638,978Long-term liabilities1,1831,256Long-term debt7111,104EquityBest Buy Co., Inc. Shareholders' equityPreferred stock, $1.00 par value----Common stock, $0.10 par value3942Additional paid-in capital18441Retained earnings6,3725,797Accumulated other comprehensive income (loss)17340Total Best Buy Co., Inc. shareholders' equity6,6026,320Noncontrolling interest690644Total equity7,2926,964Total liabilities and equity$ 17,849$ 18,302

(a) Compute the following for Best Buy Co.

Hint: RNOA is 18.86% and NOPAT is $1,389.Assume thatEquity and other investmentsare operating.

Rounding instructions:Do not round until your final answer. Round FLEV and NCI ratio four decimal places. Round Spread and NNEP two decimal places.

Remember to use negative signs in answers when appropriate.

2011NNO=Answer

($ millions)

2010NNO=Answer

($ millions)

2011NNE=Answer

($ millions)

2011NNEP =Answer

%

2011FLEV =Answer

2011Spread =Answer

%

2011NCI ratio =Answer

(b) Assume that Best Buy Co.'s return on equity (ROE) for 2011 is 19.76% and its return on net operating assets (RNOA) is 18.86%. Confirm computations to yield the relation: ROE = [RNOA + (FLEV X Spread)] X NCI ratio.

2011 ROE =Answer

% = [Answer

%+(Answer

XAnswer

%)] XAnswer

(c) What do the computations of the nonoperating return in parts (a) and (b) imply about the company's use of borrowed funds

Best Buy is able to borrow funds and invest the proceeds in operating assets yielding a return in excess of the cost of its debt which results in a benefit to stockholders.

Best Buy is able to borrow funds, however, is unable to invest the proceeds in operating assets to yield a return in excess of the cost of its debt which results in a loss for stockholders.

Best Buy is heavily debt financed and unable to earn a sufficient return with the proceeds to cover the cost of its debt, which results in a loss to stockholders.

Best Buy is able to borrow fund and invest the proceeds in operating assets yielding a return in excess of the cost of its debt. However, it results in a loss to its stockholders.