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)	2006	2005	2004
Net sales	$22,923	$ 21,167	$ 20,011
Operating expenses
Cost of sales	11,713	10,408	10,002
Selling, general and administrative expenses	5,066	4,631	4,437
Research, development and related expenses	1,522	1,274	1,246
Loss/(gain) from sale of business	(1,074)	--	--
Total operating expenses	17,227	16,313	15,685
Operating income	5,696	4,854	4,326
Interest expenses and income
Interest expense	122	82	69
Interest income	(51)	(56)	(46)
Total interest expense	71	26	23
Income before income taxes	5,625	4,828	4,303
Provision for income taxes	1,723	1,627	1,400
Net income including noncontrolling interest	3,902	3,201	2,903
Less: Net income attributable to noncontrolling interest	51	55	62
Net income	$ 3,851	$ 3,146	$ 2,841

Consolidated Balance Sheets
($ millions)	2006	2005
Assets
Current Assets
Cash and cash equivalents	$ 1,447	$ 1,072
Marketable securities-current	471	--
Accounts receivable-net	3,102	2,838
Inventories
Finished goods	1,235	1,050
Work in process	795	706
Raw materials and supplies	571	406
Total inventories	2,601	2,162
Other current assets	1,325	1,043
Total current assets	8,946	7,115
Marketable securities-noncurrent	166	--
Investments	314	272
Property, plant and equipment	17,017	16,127
Less: Accumulated depreciation	(11,110)	(10,534)
Property, plant and equipment-net	5,907	5,593
Goodwill	4,082	3,530
Intangible assets-net	708	486
Prepaid pension benefits	395	2,905
Other assets	776	640
Total assets	$ 21,294	$ 20,541
Liabilities
Current liabilities
Short-term borrowings and current portion of long-term debt	$ 2,506	$ 1,072
Accounts payable	1,402	1,256
Accrued payroll	520	469
Accrued income taxes	1,134	989
Other current liabilities	1,761	1,452
Total current liabilities	7,323	5,238
Long-term debt	1,047	1,309
Pension and postretirement benefits	--	--
Other liabilities	2,965	3,599
Total liabilities	11,335	10,146
Equity
3M Company shareholders' equity: Common stock, par value $.01 per share;	9	9
Additional paid-in capital	2,484	2,225
Retained earnings	17,933	15,715
Treasury stock	(8,456)	(6,965)
Accumulated other comprehensive income (loss)	(2,011)	(589)
Total 3M Company shareholders' equity	9,959	10,395
Noncontrolling interest	-	-
Total equity	9,959	10,395
Total liabilities and equity	$ 21,294	$ 20,541

(e) Compute return on equity (ROE) for 2006. (Round your answers to two decimal places. Do not round until your final answer.) 2006 ROE =Answer% (f) What is the nonoperating return component of ROE for 2006? (Round your answers to two decimal places.) Hint: Use your prior rounded answers to compute this answer. 2006 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.