QUESTION 6 Partially correct Mark 5.24 out of 10.00 Flag question Reformulating Financial Analysis for Equity Method Investments Cummins Inc. reports investments in affiliated companies, consisting mainly of investments in nine manufacturing joint ventures. Cummins reports those investments on its balance sheet at $958 million and provides the following financial information on its investee companies in a footnote to its 10-K report. As of and for the years ended Dec. 31 Equity Investee Financial Summary $ millions 2015 2014 2013 Net sales Gross margin Net income Cummins' share of net income Royalty and interest income $5,946 1,265 521 $273 42 $315 $7,426 1,539 630 $330 40 $370 $7,799 1,719 690 $325 36 $361 Total equity, royalty and interest from investees Current assets Noncurrent assets Current liabilities Noncurrent liabilities $2,476 1,667 (1,875) (420) $1,848 $2,458 1,539 (1,796) (284) $1,917 Net assets $958 $956 Cummins' share of net assets Make the following assumptions about the above data All assets are operating assets. All current liabilities are operating liabilities Non-current liabilities are loans that bear interest at 8% Make the following assumptions about the above data All assets are operating assets. All current liabilities are operating liabilities . Non-current liabilities are loans that bear interest at 8% EMI (Equity Method Investments) investees' tax rate is 35% The following information is derived from the 2015 form 10-K for Cummins Inc., the investor company $ millions Revenue Net operating profit after tax (NOPAT) Net nonoperating expense (NNE) Net income attributable to Cummins Inc. ,399 Net operating assets (NOA) Net nonoperating obligations (NNO) Equity of Cummins Inc. shareholders 2015 $19,110 1,420 21 7,578 (172) 7,406 a. Compute net operating profit after tax (NOPAT) for the EMI investees. Round to the nearest whole number $ 536 million b. Compute net operating assets (NOA) and net nonoperating obligations (NNO) for the EMI investees NOA$ 2,201 million NNO $284 million C. Following the process in Analyst Adjustments box 9.1, reformulate the following ratios for Cummins for 2015. For simplicity only, use year-end balance sheet numbers provided instead of averages First, compute the adjusted balances. Income Statement Adjusted Balances Balance Sheet Adjusted Balances NOA $ 25,056 Revenue 19,110X NOPAT NNO Equity Net nonoperating expense 21 X 36 X Net income 1,399 Next, compute the following ratios: 1. using Cummins' figures (unadjusted) and 2. using the adjusted balances as computed above . Round RNOA, NOPM, and ROE to one decimal place (ex: 0.2345-23.5%) Round NOAT and FLEV to two decimal places Use negative signs with answers, when appropriate Unadjusted Adjusted RNOA 18.7 % 17.2 % 7.4 % (2.5) % | (18.9) X (0.02) NOPM 6.7 % ROE (2.6) % NOAT (18.9) X FLEV 0.02 QUESTION 6 Partially correct Mark 5.24 out of 10.00 Flag question Reformulating Financial Analysis for Equity Method Investments Cummins Inc. reports investments in affiliated companies, consisting mainly of investments in nine manufacturing joint ventures. Cummins reports those investments on its balance sheet at $958 million and provides the following financial information on its investee companies in a footnote to its 10-K report. As of and for the years ended Dec. 31 Equity Investee Financial Summary $ millions 2015 2014 2013 Net sales Gross margin Net income Cummins' share of net income Royalty and interest income $5,946 1,265 521 $273 42 $315 $7,426 1,539 630 $330 40 $370 $7,799 1,719 690 $325 36 $361 Total equity, royalty and interest from investees Current assets Noncurrent assets Current liabilities Noncurrent liabilities $2,476 1,667 (1,875) (420) $1,848 $2,458 1,539 (1,796) (284) $1,917 Net assets $958 $956 Cummins' share of net assets Make the following assumptions about the above data All assets are operating assets. All current liabilities are operating liabilities Non-current liabilities are loans that bear interest at 8% Make the following assumptions about the above data All assets are operating assets. All current liabilities are operating liabilities . Non-current liabilities are loans that bear interest at 8% EMI (Equity Method Investments) investees' tax rate is 35% The following information is derived from the 2015 form 10-K for Cummins Inc., the investor company $ millions Revenue Net operating profit after tax (NOPAT) Net nonoperating expense (NNE) Net income attributable to Cummins Inc. ,399 Net operating assets (NOA) Net nonoperating obligations (NNO) Equity of Cummins Inc. shareholders 2015 $19,110 1,420 21 7,578 (172) 7,406 a. Compute net operating profit after tax (NOPAT) for the EMI investees. Round to the nearest whole number $ 536 million b. Compute net operating assets (NOA) and net nonoperating obligations (NNO) for the EMI investees NOA$ 2,201 million NNO $284 million C. Following the process in Analyst Adjustments box 9.1, reformulate the following ratios for Cummins for 2015. For simplicity only, use year-end balance sheet numbers provided instead of averages First, compute the adjusted balances. Income Statement Adjusted Balances Balance Sheet Adjusted Balances NOA $ 25,056 Revenue 19,110X NOPAT NNO Equity Net nonoperating expense 21 X 36 X Net income 1,399 Next, compute the following ratios: 1. using Cummins' figures (unadjusted) and 2. using the adjusted balances as computed above . Round RNOA, NOPM, and ROE to one decimal place (ex: 0.2345-23.5%) Round NOAT and FLEV to two decimal places Use negative signs with answers, when appropriate Unadjusted Adjusted RNOA 18.7 % 17.2 % 7.4 % (2.5) % | (18.9) X (0.02) NOPM 6.7 % ROE (2.6) % NOAT (18.9) X FLEV 0.02
