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

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

a. Compute net operating profit after tax (NOPAT) for the EMI investees.

Round to the nearest whole number. $Answer in millions

b. Compute net operating assets (NOA) and net nonoperating obligations (NNO) for the EMI investees.

-NOA $Answer million

-NNO $Answer 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.

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.

Equity Inwestee Finarcial Smary ($millions)As of as for the years ended Dec31 20142013 Net Sales Gross Margin Net Income Cummins share of net income Royalty and interest income 5946 TA269 126515391719 690 130 330 42 Total equity, royalty and interest from investees 37H 361 Crrent assets Nonarrent assets Currerit liabilities Nonarrent Liabilities 24582476 15391667 1796 -1875 -284 1917 Net Assets 1848 Cummins' share of net assets 958 956 Equity Inwestee Finarcial Smary ($millions)As of as for the years ended Dec31 20142013 Net Sales Gross Margin Net Income Cummins share of net income Royalty and interest income 5946 TA269 126515391719 690 130 330 42 Total equity, royalty and interest from investees 37H 361 Crrent assets Nonarrent assets Currerit liabilities Nonarrent Liabilities 24582476 15391667 1796 -1875 -284 1917 Net Assets 1848 Cummins' share of net assets 958 956