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Direct Computation of Nonoperating Return Balance sheets and income statements for Costco Wholesale Corporation follow. Costco Wholesale Corporation Consolidated Statements of Earnings For Fiscal Years Ended ($ millions) August 28, 2016 August 30, 2015 August 31, 2014 Revenue Net Sales $116,073 $113,666 $110,212 Membership fees 2,646 2,533 2,428 Total revenue 118,719 116,199 112,640 Operating expenses Merchandise costs 102,901 101,065 98,458 Selling, general and administrative 12,068 11,445 10,899 Preopening expenses 65 63 Operating Income 3,672 3,624 3,220 Other income (expense) Interest expense (133) (124) (113) Interest income and other, net 80 104 Income before income taxes 3,619 3,604 Provision for income taxes 3,197 1,243 1,195 Net income including noncontrolling interests 1,109 2,376 2,409 Net income attributable to noncontrolling interests 2,088 (26) Net income attributable to Costco (30) $2,350 $2,377 $2,058 (32) August 28, 2016 August 30, 2015 Costco Wholesale Corporation Consolidated Balance Sheets (5 millions, except par value and share data) Assets Current assets Cash and cash equivalents Short-term investments Receivables, net Merchandise inventories Deferred income taxes and other current assets Total current assets Property and equipment Land $3,379 1,350 1,252 8,969 268 $4,801 1,618 1,224 8,908 228 15,218 16,779 Buildings and improvements Equipment and fixtures Construction in progress Gross property and equipment Less accumulated depreciation and amortization Net property and equipment Other assets Total assets Liabilities and equity Current liabilities Accounts payable Current portion long-term debt Accrued salaries and benefits Accrued member rewards Deferred membership fees Other current liabilities Total current liabilities 5,395 13,994 6,077 701 26,167 (9,124) 17,043 902 $33,163 4,961 12,618 5,274 811 23,664 (8,263) 15,401 837 $33,017 $7,612 $1,100 2,629 869 $9,011 $1,283 2,468 813 1,269 1,695 16 520 1,362 2,003 15,575 TOTEM TO 4,852 4,061 1,195 20,831 783 22,174 Long-term debt, excluding current portion Other liabilities Total liabilities Equity Preferred stock, 50.005 par value: 100,000,000 shares authorized; no shares issued and outstanding Common stock, 50.005 par value: 900,000,000 shares authorized; 437,524,000 and 437,952,000 shares issued and outstanding Additional paid-in-capital Accumulated other comprehensive loss Retained earnings Total Costco stockholders' equity Noncontrolling interests Total equity Total liabilities and equity 5,490 (1,099) 7.686 12,079 253 12,332 $33,163 5,218 (1,121) 6.518 10,617 226 10,843 $33,017 (a) Compute Costco's financial leverage (FLEV). Spread, and noncontrolling interest (NCI) ratio for 2016; recall, NNE - NOPAT-Net income. Remember to use negative signs with answers, when appropriate. 2016 NNO ES million 2015 NNOS million 2016 NNE = $ million 2016 NNEP * Round NNEP to two decimal places. 2016 FLEV Round FLEV to four decimal places 2016 Spread = % Round Spread to two decimal places 2016 NCI 7 cio Round NCI ratio to four decimal places (b) Assume that Costco's return on equity (ROE) for 2016 is 20.71% and its return on net operating assets (RNOA) 20.66. Confirm computations to yield the relation ROERNOA (FLEV X Spreadil X NCI ratio 2016 ROE Support (c) What do your computations of the nonoperating return in parts(a) and (b) imply about the company's use of borrowed funds? Costco's FLEV is negative meaning its average non operating assets exceed its non-operating liabilities. Costco has a high level of short term investments to use for new opportunities Costco's FLEV is negative meaning its average non operating liabilities exceed its non-operating assets. Costco will need to rely on debt to finance new opportunities Costco's FLEV is positive meaning its average non operating assets exceed its non-operating liabilities Costco has a high level of cash and short term investments to use for new opportunities Costco's FLEV is positive - meaning its average non operating liabilities exceed its non-operating assets. Costco will need to rely on debt to finance new opportunities Analysis and Interpretation of Profitability Balance sheets and income statements for Costco Wholesale Corporation follow. Costco Wholesale Corporation Consolidated Statements of Earnings For Fiscal Years Ended ($ millions) August 28, 2016 August 30, 2015 August 31, 2014 Revenue Net Sales $116,073 $113,666 $110,212 Membership fees 2,646 2,533 2,428 Total revenue 118,719 116,199 112,640 Operating expenses Merchandise costs 102,901 101,065 98,458 Selling, general and administrative 12,068 11,445 10,899 Preopening expenses 78 65 Operating Income 3,672 3,624 3,220 Other income (expense) Interest expense (133) (124) (113) Interest income and other, net 80 104 Income before income taxes 3,619 3,604 3,197 Provision for income taxes 1,243 1,195 1,109 Net income including noncontrolling interests 2,376 2,409 2,088 Net income attributable to noncontrolling interests (32) (30) Net income attributable to Costco $2,350 $2,377 $2,058 63 90 (26) August 28, 2016 August 30, 2015 $4,801 1,618 $3,379 1,350 1,252 8,969 268 15,218 1,224 8,908 228 16,779 5,395 Costco Wholesale Corporation Consolidated Balance Sheets ($ millions, except par value and share data) Assets Current assets Cash and cash equivalents Short-term investments Receivables, net Merchandise inventories Deferred income taxes and other current assets Total current assets Property and equipment Land Buildings and improvements Equipment and fixtures Construction in progress Gross property and equipment Less accumulated depreciation and amortization Net property and equipment Other assets Total assets Liabilities and equity Current liabilities Accounts payable Current portion long-term debt Accrued salaries and benefits Accrued member rewards Deferred membership fees Other current liabilities Total current liabilities 13,994 6,077 701 26,167 (9,124) 17,043 902 $33,163 4,961 12,618 5,274 811 23,664 (8,263) 15,401 837 $33,017 $7,612 $1,100 2,629 869 1,362 2,003 15,575 $9,011 $1,283 2,468 813 1,269 1,695 16,539 4,061 1,195 20,831 TO,059 4,852 783 22,174 Total current autres Long-term debt, excluding current portion Other liabilities Total liabilities Equity Preferred stock, 50.005 par value: 100,000,000 shares authorized; no shares issued and outstanding Common stock, $0.005 par value: 900,000,000 shares authorized: 437,524,000 and 437,952,000 shares issued and outstanding Additional paid-in-capital Accumulated other comprehensive loss Retained earnings Total Costco stockholders' equity Noncontrolling interests Total equity Total liabilities and equity 5,218 (1,121) 6,518 5,490 (1,099) 7,686 12,079 253 12,332 $33,163 10,617 226 10,843 $33,017 HINT:For Sales use "Total revenues for your computations, when applicable tal Compute net operating profit after tax (NOPAT) for 2016. Assume that the combined federal and state at t es u nd to the nearest whole number 2016 NOPAT 0 5 milions) by Compute net operating assets (NCA) for 2016 and 2015. 2016 NOA 2015 NOA-0 millions) calculate RNA) c) Compute Costco RNOA net operating profit margin (NOM) and net operating asset turnover (NOAT) for 2016. Do not round until final answer. Round two decimal places. Do not use NOPMX NOAT TO 2016 RNOA 2016 NOPM 0 2016 NOAT (0) Compute net nonoperating obligations INNO) for 2016 and 2015. 2016 NND 0 milions 2015 NNO- 0 millions) (e) Compute return on equity (ROE) for 2016. (Do not round until final answer. Round answer two decimal places) 2016 ROE = 0 % (Infer the nonoperating return component of ROE for 2016. (Use answers from above to calculate. Round two decimal places.) 0 % (g) What does the relation between ROE and RNOA suggest about Costco's use of equity capital? CROE > RNOA implies that Costco's equity has grown faster than its NOA ROE >RNOA implies that Costco has taken on too much financial leverage. ROE > RNOA implies that Costco is able to borrow money to fund operating assets that yield a return greater than its cost of debt. ROE > RNOA implies that Costco increased its financial leverage during the period. Analysis and Interpretation of Profitability Balance sheets and income statements for Costco Wholesale Corporation follow. Costco Wholesale Corporation Consolidated Statements of Earnings For Fiscal Years Ended ($ millions) August 28, 2016 August 30, 2015 August 31, 2014 Revenue Net Sales $116,073 $113,666 $110,212 Membership fees 2,646 2,533 2,428 Total revenue 118,719 116,199 112,640 Operating expenses Merchandise costs 102,901 101,065 98,458 Selling, general and administrative 12,068 11,445 10.899 Preopening expenses 78 Operating Income 3,672 3,624 3,220 Other income (expense) Interest expense (133) (124) (113) Interest income and other, net 80 104 90 Income before income taxes 3,619 3,604 3,197 Provision for income taxes 1,243 1,195 1,109 Net Income including noncontrolling interests 2,376 2,409 2,088 Net income attributable to noncontrolling interests (26) (32) (30) Net income attributable to Costco $2,350 $2,377 $2,058 August 28, 2016 August 30, 2015 $4,801 1,618 $3,379 1,350 1,252 8.969 268 15,218 1.224 8.908 228 16,779 Costco Wholesale Corporation Consolidated Balance Sheets ($ millions, except par value and share data) Assets Current assets Cash and cash equivalents Short-term investments Receivables, net Merchandise inventories Deferred income taxes and other current assets Total current assets Property and equipment Land Buildings and improvements Equipment and fixtures Construction in progress Gross property and equipment Less accumulated depreciation and amortization Net property and equipment Other assets Total assets Liabilities and equity Current abilities Accounts payable Current portion long-term debt Accrued salaries and benefits Accrued member rewards Deferred membership fees Other current liabilities Total t hilities Start a search 5.395 13,994 6,077 701 26,167 19.124) 17.043 902 $33,163 4,961 12,618 5.274 811 23,664 8.263) 15,401 8 37 $33,017 $7,612 $1,100 2,629 59,011 $123 2,468 1269 1,362 2,003 2,003 15,575 4,061 1,195 1,695 16,539 4,852 783 20,831 22,174 Other current liabilities Total current liabilities Long-term debt, excluding current portion Other liabilities Total liabilities Equity Preferred stock, $0.005 par value: 100,000,000 shares authorized; no shares issued and outstanding Common stock, $0.005 par value: 900,000,000 shares authorized; 437,524,000 and 437,952,000 shares issued and outstanding Additional paid-in-capital Accumulated other comprehensive loss Retained earnings Total Costco stockholders' equity Noncontrolling interests Total equity Total liabilities and equity 2 5,218 5,490 (1,099) 7,686 12,079 253 12,332 $33,163 (1.121) 6,518 10,617 226 10,843 $33,017 HINT: For Sales use "Total revenues" for your computations, when applicable. (a) Compute net operating profit after tax (NOPAT) for 2016. Assume that the combined federal and state : 2016 NOPAT = 2,364 x ($ millions) (b) Compute net operating assets (NOA) for 2016 and 2015. 2016 NOA = 25,193 ($ millions) % ($ millions) 2015 NOA = 25,499 Start a search o 96 HINT: For Sales use "Total revenues" for your computations, when applicable. (a) Compute net operating profit after tax (NOPAT) for 2016. Assume that the combined federal and state statutory tax rate is 37%. (Round to the nearest whole number.) 2016 NOPAT = 2,364 % ($ millions) (b) Compute net operating assets (NOA) for 2016 and 2015. 2016 NOA = 25,193 x ($ millions) 2015 NOA = 25,499 % (5 millions) (c) Compute Costco's RNOA, net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2016. (Do not round until final answer. Round two decimal places. Do not use NOPM X NOAT to calculate RNOA) 2016 RNOA = 9 2016 NOPM = 3 * % 2016 NOAT = 5 (d) Compute net nonoperating obligations (NNO) for 2016 and 2015. 2016 NNO = 3,110 x (5 millions) 2015 NNO = 3,706 x ($ millions) Start a search (e) Compute return on equity (ROE) for 2016. (Do not round until final answer. Round answer two decimal places) 2016 ROE = 0 * % (f) Infer the nonoperating return component of ROE for 2016. (Use answers from above to calculate. Round two decimal places.) * % (g) What does the relation between ROE and RNOA suggest about Costco's use of equity capital? ROE > RNOA implies that Costco's equity has grown faster than its NOA. ROE > RNOA implies that Costco has taken on too much financial leverage. ROE > RNOA implies that Costco is able to borrow money to fund operating assets that yield a return greater than its cost of debt. ROE > RNOA implies that Costco increased its financial leverage during the period. Mark 1.00 out of 1.00
