Question text

Analysis and Interpretation of Profitability Balance sheets and income statements for 3M Company follow.

Consolidated Statements of Income
Years ended December 31 ($ millions)	2008	2007	2006
Net sales	$25,269	$24,462	$22,923
Operating expenses
Cost of sales	13,379	12,735	11,713
Selling, general and administrative expenses	5,245	5,015	5,066
Research, development and related expenses	1,404	1,368	1,522
Loss/(gain) from sale of business	23	(849)	(1,074)
Total operating expenses	20,051	18,269	17,227
Operating income	5,218	6,193	5,969
Interest expenses and income
Interest expense	215	210	122
Interest income	(105)	(132)	(51)
Total interest expense	110	78	71
Income before income taxes	5,108	6,115	5,625
Provision for income taxes	1,588	1,964	1,723
Net income including noncontrolling interest	3,520	4,151	3,902
Less: Net income attributable to noncontrolling interest	60	55	51
Net income	$ 3,460	$ 4,096	$ 3,851

Consolidated Balance Sheets
($ millions)	2008	2007
Assets
Current Assets
Cash and cash equivalents	$ 1,849	$ 1,896
Marketable securities-current	373	579
Accounts receivable-net	3,195	3,362
Inventories
Finished goods	1,505	1,349
Work in process	851	880
Raw materials and supplies	657	623
Total inventories	3,013	2,852
Other current assets	1,168	1,149
Total current assets	9,598	9,838
Marketable securities-noncurrent	352	480
Investments	111	298
Property, plant and equipment	18,812	18,390
Less: Accumulated depreciation	(11,926)	(11,808)
Property, plant and equipment-net	6,886	6,582
Goodwill	5,753	4,589
Intangible assets-net	1,398	801
Prepaid pension benefits	36	1,378
Other assets	1,659	728
Total assets	$ 25,793	$ 24,694
Liabilities
Current liabilities
Short-term borrowings and current portion of long-term debt	$ 1,552	$ 901
Accounts payable	1,301	1,505
Accrued payroll	644	580
Accrued income taxes	350	543
Other current liabilities	1,992	1,833
Total current liabilities	5,839	5,362
Long-term debt	5,166	4,019
Pension and postretirement benefits	2,847	--
Other liabilities	1,637	3,566
Total liabilities	15,489	12,947
Equity
3M Company shareholders' equity	9	9
Additional paid-in capital	3,006	2,785
Retained earnings	22,227	20,316
Treasury stock	(11,676)	(10,520)
Accumulated other comprehensive income (loss)	(3,686)	(843)
Total 3M Company shareholders' equity	9,880	11,747
Noncontrolling interest	424	--
Total equity	10,304	11,747
Total liabilities and equity	$ 25,793	$ 24,694

(e) Compute return on equity (ROE) for 2008. (Round your answers to two decimal places. Do not round until your final answer.) 2008 ROE =Answer% (f) What is the nonoperating return component of ROE for 2008? (Round your answers to two decimal places.) Hint: Use your prior rounded answers to compute this answer. 2008 nonoperating return =Answer% (g) Which of the following statements reflects the best inference we can draw from the difference between 3M's ROE and RNOA?

ROE > RNOA implies that 3M has taken on too much financial leverage.

ROE > RNOA implies that 3M is able to borrow money to fund operating assets that yield a return greater than its cost of debt.

ROE > RNOA implies that 3M's equity has grown faster than its NOA.

ROE > RNOA implies that 3M has increased its financial leverage during the period.