Refer to Nordstrom's financial statements provided and answer the questions attached.

Nordstrom, Inc. Consolidated Statements of Earnings In millions except per share amounts Fiscal year Net sales Credit card revenues Total revenues Cost of sales and related buying and occupancy costs Selling, general and administrative expenses: Retail stores, direct and other segments Credit segment Gain on sale of Faonnable Earnings on investment in asset-backed securities, net Earnings before interest and income taxes Interest expense, net Earnings before income taxes Income tax expense Net earnings 2009 $8,258 369 8,627 (5,328) 2008 $8,272 301 8,573 (5,417) 2007 $8,828 252 9,080 (5,526) (2,109) (356) - - 834 (138) 696 (255) $441 (2,103) (274) 779 (131) 648 (247) $401 (2,161) (198) 34 18 1,247 (74) 1,173 (458) $715 Earnings per basic share Earnings per diluted share $2.03 $2.01 $1.85 $1.83 $2.92 $2.88 Basic shares Diluted shares 216.8 219.7 216.6 219.2 244.8 248.8 The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. 36 Nordstrom, Inc. Consolidated Balance Sheets In millions Assets Current assets: Cash and cash equivalents Accounts receivable, net Merchandise inventories Current deferred tax assets, net Prepaid expenses and other Total current assets Land, buildings and equipment, net Goodwill Other assets Total assets Liabilities and Shareholders' Equity Current liabilities: Commercial paper Accounts payable Accrued salaries, wages and related benefits Other current liabilities Current portion of long-term debt Total current liabilities Long-term debt, net Deferred property incentives, net Other liabilities Commitments and contingencies Shareholders' equity: Common stock, no par value: 1,000 shares authorized; 217.7 and 215.4 shares issued and outstanding Retained earnings Accumulated other comprehensive loss Total shareholders' equity Total liabilities and shareholders' equity January 30, 2010 January 31, 2009 $795 2,035 898 238 88 4,054 2,242 53 230 $6,579 $72 1,942 900 210 93 3,217 2,221 53 170 $5,661 - $726 336 596 356 2,014 2,257 469 267 $275 563 214 525 24 1,601 2,214 435 201 1,066 525 (19) 1,572 $6,579 997 223 (10) 1,210 $5,661 The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. Nordstrom, Inc. and subsidiaries 37 Nordstrom, Inc. Consolidated Statements of Shareholders' Equity In millions except per share amounts Balance at February 3, 2007 Cumulative effect of accounting change Adjusted Beginning Balance at February 3, 2007 Net earnings Other comprehensive (loss) earnings: Foreign currency translation adjustment Postretirement plan adjustments, net of tax of ($5) Fair value adjustment to investment in asset-backed securities, net of tax of $3 Comprehensive net earnings Cash dividends paid ($0.54 per share) Issuance of common stock for: Stock option plans Employee stock purchase plan Other Stock-based compensation Repurchase of common stock Balance at February 2, 2008 Net earnings Other comprehensive earnings: Postretirement plan adjustments, net of tax of ($8) Comprehensive net earnings Cash dividends paid ($0.64 per share) Effect of postretirement plan measurement date change Issuance of common stock for: Stock option plans Employee stock purchase plan Other Stock-based compensation Repurchase of common stock Balance at January 31, 2009 Net earnings Other comprehensive loss: Postretirement plan adjustments, net of tax of $6 Comprehensive net earnings Cash dividends paid ($0.64 per share) Issuance of common stock for: Stock option plans Employee stock purchase plan Other Stock-based compensation Balance at January 30, 2010 Common Stock Shares Amount 257.3 $827 Retained Earnings $1,351 Total $2,169 257.3 827 (3) 1,348 715 (9) (3) 2,166 715 (15) 7 (15) 7 (5) (134) (5) 702 (134) 61 17 5 26 $936 (1,728) $201 401 $(22) 61 17 5 26 (1,728) $1,115 401 12 (138) (3) 12 413 (138) (3) 17 17 1 26 $997 (238) $223 441 $(10) 17 17 1 26 (238) $1,210 441 (9) (139) (9) 432 (139) 1.5 0.7 0.1 217.7 27 13 1 28 $1,066 $525 $(19) 27 13 1 28 $1,572 2.2 0.4 0.1 (39.1) 220.9 0.8 0.6 (6.9) 215.4 The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. 38 Accumulated Other Comprehensive Earnings (Loss) $(9) Nordstrom, Inc. Consolidated Statements of Cash Flows In millions Fiscal year Operating Activities Net earnings Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization of buildings and equipment, net Amortization of deferred property incentives and other, net Stock-based compensation expense Deferred income taxes, net Tax benefit from stock-based payments Excess tax benefit from stock-based payments Provision for bad debt expense Gain on sale of Faonnable Change in operating assets and liabilities: Accounts receivable Investment in asset-backed securities Merchandise inventories Prepaid expenses and other assets Accounts payable Accrued salaries, wages and related benefits Other current liabilities Income taxes Deferred property incentives Other liabilities Net cash provided by operating activities 2009 2008 2007 $441 $401 $715 313 (42) 32 (58) 6 (7) 251 - 302 (21) 28 (36) 3 (4) 173 269 (36) 26 (42) 28 (26) 107 (34) (159) - (1) (38) 168 120 8 73 96 48 1,251 (93) 53 38 16 (54) 28 (76) 119 (29) 848 (1,083) 420 (36) (19) (64) 36 (6) 58 (1) 312 Investing Activities Capital expenditures Change in credit card receivables originated at third parties Proceeds from sale of Faonnable Other, net Net cash used in investing activities (360) (182) - 1 (541) (563) (232) 3 (792) (501) (151) 216 15 (421) Financing Activities (Repayments) proceeds from commercial paper borrowings, net Proceeds from long-term borrowings, net of discounts Principal payments on long-term borrowings Increase in cash book overdrafts Cash dividends paid Repurchase of common stock Proceeds from exercise of stock options Proceeds from employee stock purchase plan Excess tax benefit from stock-based payments Other, net Net cash provided by (used in) financing activities (275) 399 (25) 9 (139) - 21 13 7 3 13 275 150 (410) 20 (138) (264) 13 17 4 (9) (342) 2,510 (680) 5 (134) (1,702) 34 17 26 (12) 64 Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 723 72 $795 (286) 358 $72 (45) 403 $358 Supplemental Cash Flow Information Cash paid during the year for: Interest (net of capitalized interest) Income taxes $134 $240 $145 $340 $75 $478 The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. Nordstrom, Inc. and subsidiaries 39 1. What does return on equity (ROE) measure? Why is it important to consider ROE and not just net income in dollar terms? 2. How do return on equity (ROE) and return on net operating assets (RNOA) differ? Explain what the nonoperating portion of ROE represents. 3. In general, what is a company's \"marginal\" tax rate? What is meant by the term \"tax shield\"? Explain the importance of considering the tax shield that arises from debt. 4. Refer to Nordstrom's balance sheets for fiscal 2007 through 2009. Calculate net operating assets for fiscal 2009, 2008 and 2007 using the chart below. Assume that Other assets, Other current liabilities, Deferred property incentives, and Other liabilities are operating items. Fiscal 2009 Fiscal 2008 Fiscal 2007 Operating Assets Operating liabilities Non-operating assets 5. Refer to Nordstrom's statement of earnings for fiscal 2009 and 2008. Calculate net operating profit after tax (NOPAT) for fiscal 2009 and 2008. Assume that the company's (as estimated by the combined federal and state statutory tax rates) is 38.5% for both years. What is the dollar amount of Nordstrom's tax shield from nonopereating activities in fiscal 2009? 6. Compute return on net operating assets (RNOA) for fiscal 2009 and 2008. Be sure to use average net operating assets in the denominator. 7. Compute and interpret return on equity (ROE) for fiscal 2009 and 2008. Be sure to use average equity in the denominator. Calculate the difference between ROE and RNOA. What inference do you draw from this comparison? 8. The nonoperating return portion of ROE can be calculated directly as shown below. Calculate and interpret financial leverage (FLEV) and Spread. Verify that the product of FLEV and Spread is equal to the nonoperating return you calculated in part h (that is, the difference between ROE and RNOA). Nonoperating return = FLEV x Spread FLEV = Average not nonoperating obligations/Average shareholders' equity Spread=RNOA - (Net nonoperating expense/average net nonoperating obligations) FLEV is a measure of financial leverage. Spread measures the amount by which operating return exceeds the cost of borrowing. Net nonoperating obligations are measured as all nonoperating liabilities (including short and long term debt) less all nonoperating assets (including marketable securities and other passive investments). Net nonoperating expense is the after-tax nonoperating expenses such as investment gains or losses. It also includes the effect of discontinued operations reported on the income statement. 9. TJX, Inc., operates several off-price apparel and home-fashion chains in the United States and worldwide, including TJ Maxx and Marshalls. The company has over 2,700 stores that sell brand name and designer merchandise at prices that are 20% to 60% below regular department-store prices. Below are data for the company's fiscal year ended January 30, 2010. For the year ended January 30, 2010 Average for fiscal 2009 Sales $20,288,444 Net Income $1,213,572 Net operating profit after tax $1,237,870 Net nonoperating expense $24,298 Net Operating Assets $3,232,265 Net Nonoperating Obligations $720,349 Shareholders' Equity $2,511,917 ROE= (NOPM X NOAT) + (FLEV+Spread) Use this ROE disaggregation to complete the table below. Compare and contrast the performance of TJX and Nordstrom for fiscal 2009 using the overall ROE and its components. Nordstrom TJX ROE RNOA NOPM NOAT Nonoperating return FLEV Spread 10. Assume you have been hired by Nordstrom to help the company improve RNOA in 2010. What are some ways to accomplish this goal? Be specific about the components of ROE on which you would focus. 11. Nordstrom, Inc. Consolidated Balance Sheets In millions Assets Current assets: Cash and cash equivalents Accounts receivable, net Merchandise inventories Current deferred tax assets, net Prepaid expenses and other Total current assets January 31, 2009 February 2, 2008 $72 1,942 900 210 93 3,217 $358 1,788 956 181 78 3,361 Land, buildings and equipment, net Goodwill Other assets Total assets Liabilities and Shareholders' Equity Current liabilities: Commercial paper Accounts payable Accrued salaries, wages and related benefits Other current liabilities Current portion of long-term debt Total current liabilities Long-term debt, net Deferred property incentives, net Other liabilities Commitments and contingencies Shareholders' equity: Common stock, no par value: 1,000 shares authorized; 215.4 and 220.9 shares issued and outstanding Retained earnings Accumulated other comprehensive loss Total shareholders' equity Total liabilities and shareholders' equity 2,221 53 170 $5,661 1,983 53 203 $5,600 $275 563 214 525 24 1,601 2,214 435 201 $556 268 550 261 1,635 2,236 369 245 997 223 (10) 1,210 $5,661 936 201 (22) 1,115 $5,600