The following financial statements were reported for a firm for fiscal year 2012 (in millions of dollars):

Statement of Shareholders' Equity
Balance, end of fiscal year 2011 ...........................1,430
Share issues ................................................... 822
Repurchase of 24 million shares ...........................(720)
Cash dividend ................................................(180)
Unrealized gain on debt investments ...................... 50
Net income .................................................... 468
Balance, end of fiscal year 2012 ........................... 1,870
The firm's income tax rate is 35%. The firm reported $15 million in interest income and $98 million in interest expense for 2012. Sales revenue was $3,726 million.
a. Prepare a reformulated balance sheet and comprehensive income statement (as required in Exercise 10.6).
b. Calculate free cash flow for 2012.
c. Calculate the operating profit margin, asset turnover, and return on net operating assets for 2012. (For simplicity, use beginning-of-period balance sheet amounts in denominators.)
d. Calculate individual asset turnovers and show that they aggregate to the total asset turnover.
e. Show that the financing leverage equation holds for this firm:

ROCE = RNOA + (FLEV × Operating spread)

f. Calculate the after-tax net borrowing cost. If this borrowing cost were to be sustained in the future, what would the rate of return of common equity (ROCE) be if operating profitability (RNOA) fell to 6% and financial leverage decreased to 0.8?

g. The implicit cost of credit for accounts payable and accrued liabilities is 3% (after tax).

Show that the following leverage equation holds in this example:

RNOA = ROOA + [OLLEV × (ROOA – 3.0%)]

Transcribed Image Text:

Balance Sheet 2012 2012 2011 2011 Operating cash Short-term investments (at market) Accounts receivable inventory Property and plant Accounts payable Accrued liabilities Long-term debt 60 550 940 50 500 790 1,200 390 1,840 1,040 450 1,970 910 2,840 5,300 840 2,710 4,890 Common equity 1,870 5,300 1,430 4,890