Direct Computation of Nonoperating Return

Balance sheets and income statements for Target Corporation follow.

Income Statement
For Fiscal Years Ended ($ millions)	2008	2007	2006
Sales	$ 61,471	$ 57,878	$ 51,271
Credit card revenues	1,896	1,612	1,349
Total revenues	63,367	59,490	52,620
Cost of sales	41,895	39,399	34,927
Selling, general and administrative expenses	13,704	12,819	11,185
Credit card expenses	837	707	776
Depreciation and amortization	1,659	1,496	1,409
Earnings before interest and income taxes	5,272	5,069	4,323
Net interest expense	647	572	463
Earnings before income taxes	4,625	4,497	3,860
Provisions for income taxes	1,776	1,710	1,452
Net earnings	$ 2,849	$ 2,787	$ 2,408

Balance Sheet
($ millions, except footnotes)	February 2, 2008	February 3, 2007
Assets
Cash and cash equivalents	$ 2,450	$ 813
Credit card receivables	8,054	6,194
Inventory	6,780	6,254
Other current assets	1,622	1,445
Total current assets	18,906	14,706
Property and equipment
Land	5,522	4,934
Buildings and improvements	18,329	16,110
Fixtures and equipment	3,858	3,553
Computer hardware and software	2,421	2,188
Construction-in-progress	1,852	1,596
Accumulated depreciation	(7,887)	(6,950)
Property and equipment, net	24,095	21,431
Other noncurrent assets	1,559	1,212
Total assets	$ 44,560	$ 37,349
Liabilities and shareholders' investment
Accounts payable	$ 6,721	$ 6,575
Accrued and other current liabilities	3,097	3,180
Current portion of long-term debt and notes payable	1,964	1,362
Total current liabilities	11,782	11,117
Long-term debt	15,126	8,675
Deferred income taxes	470	577
Other noncurrent liabilities	1,875	1,347
Shareholders' investment
Common stock	68	72
Additional paid-in-capital	2,656	2,387
Retained earnings	12,761	13,417
Accumulated other comprehensive income (loss)	(178)	(243)
Total shareholders' investment	15,307	15,633
Total liabilities and shareholders' equity	$ 44,560	$ 37,349

(a) Compute the following for Target Corporation. Hint: RNOA is 11.84% and NOPAT is $3,244.

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. 2008 NNO = Answer($ millions) 2007 NNO = Answer($ millions) 2008 NNE = Answer($ millions) 2008 NNEP = Answer% 2008 FLEV = Answer 2008 Spread = Answer% (b) Assume that Target Corporation's return on equity (ROE) for 2008 is 18.42% and its return on net operating assets (RNOA) is 11.84%. Confirm computations to yield the relation: ROE = [RNOA + (FLEV X Spread)] X NCI ratio. HINT: NCI ratio = 1.0 (since there is no noncontrolling interest). 2008 ROE =Answer% = [Answer%+(Answer X Answer%)] X Answer (c) What do your computations of the nonoperating return in parts (a) and (b) imply about the company's use of borrowed funds

Target 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.

Target 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.

Target 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.

Target 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.