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	$36,131	$31,657
Operating expenses
Cost of sales	16,682	16,055
Selling, general and administrative expenses	10,968	9,992
Research, development and related expenses	1,821	1,870
Gain on sale of businesses	(547)	(586)
Total operating expenses	28,924	27,331
Operating income	7,207	4,326
Other expense, net*	207	144
Income before income taxes	7,000	4,182
Provision for income taxes	1,637	2,679
Net income including noncontrolling interest	5,363	1,503
Less: Net income attributable to noncontrolling interest	14	11
Net income attributable to 3M	$5,349	$1,492
*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	$6,219	$3,053
Marketable securities	380	1,076
Accounts receivable	5,020	8,277
Total inventories	4,366	4,034
Prepaids	741	937
Other current assets	349	266
Total current assets	17,075	17,643
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	$39,866	$41,353
Current liabilities
Short-term borrowings and current portion of long-term debt	$1,211	$1,853
Accounts payable	5,632	5,311
Accrued payroll	749	870
Accrued income taxes	243	310
Other current liabilities	2,775	2,709
Total current liabilities	10,610	11,053
Long-term debt	16,777	15,462
Pension and postretirement benefits	2,987	3,620
Other liabilities	3,010	2,962
Total liabilities	33,384	33,097
3M Company shareholders' equity
Common stock, par value	9	9
Additional paid-in capital	2,277	1,986
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	6,430	8,197
Noncontrolling interest	52	59
Total equity	6,482	8,256
Total liabilities and equity	$39,866	$41,353
Combined federal and state statutory tax rate	22.00%
ROE	73.14%
RNOA	28.11%

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

	NNE

	NOPAT

b. Compute net nonoperating obligations (NNO).

	Year	NNO
	2018
	2017

c. Compute financial leverage (FLEV).

	Numerator	Denominator	FLEV
	Net 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)	Net 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)

d. Compute NNEP and Spread.

	Numerator	Denominator	NNEP
	Net 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)	Net 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)

	RNOA (given)	NNEP	Spread

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

	Numerator	Denominator	NCI ratio

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

	Ratio	Number
	ROE (given)
	RNOA (given)
	FLEV
	Spread
	NCI ratio
	ROE

***ROE may be different due to rounding PLEASE DO NOT COPY AND PASTE SOMEONE ELSE'SANSWER BECAUSE THEY ARE WRONG. THANK YOU