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Compute ROE

Selected balance sheet and income statement information for Home Depot follows.

$ millions Jan. 31, 2016 Feb. 01, 2015


Compute the return on equity for the year ended January 31, 2016.
Operating assets $40,333 $38,223
Round answer to two decimal places (ex: 0.12345 = 12.35%)
Nonoperating
2,216 1,723
assets
Total assets 42,549 39,946 ROE = Net Income 7,009
= = 89.64%
Average Stockholders Equity 7,819
Operating
14,918 13,427
liabilities
Nonoperating
21,315 17,197
liabilities

Total liabilities 36,233 30,624

Total
stockholders' 6,316 9,322
equity

Sales 88,519
Net operating
profit before tax 11,774
(NOPBT)
Nonoperting
expense before 753
tax
Tax expense 4,012

Net income 7,009


Apply DuPont Disaggregation of ROE
Selected balance sheet and income statement information for Home Depot follows.
$ millions Jan. 31, 2016 Feb. 01, 2015

Operating assets $40,333 $38,223 Round answers to two decimal places (ex: 0.12345 = 12.35%)
Nonoperating assets 2,216 1,723 a. Compute ROE and disaggregate the ratio into its DuPont components of
Total assets 42,549 39,946 ROE = ROA * FLEV =

Operating liabilities 14,918 13,427 ROA = Net Income


=
Nonoperating liabilities 21,315 17,197 Average Total Assets
Total liabilities 36,233 30,624

FLEV = Average Total Assets


=
Total stockholders' equity 6,316 9,322 Average Total Stockholders Equity

Sales 88,519

Net operating profit before tax (NOPBT) 11,774 b. Disaggregate ROA in to profitability and productivity components.
Nonoperting expense before tax 753 PM = Net Income =
Tax expense 4,012 Sales
Net income 7,009

AT = Sales
=
Average Total Assets
.12345 = 12.35%)
nto its DuPont components of ROA and financial leverage.

89.64%

7,009
= 16.99%
41,248

41,248
= 5.28
7,819

oductivity components.
7,009
= 7.92%
88,519

88,519
= 2.15
41,248
Compute Net Operating Assets
Selected balance sheet and income statement information for Home Depot follows.
$ millions Jan. 31, 2016 Feb. 01, 2015

Operating $40,333 $38,223


assets Compute net operating assets for the years ended January 31, 2016 and February 1, 2015.
Nonoperating
assets 2,216 1,723 2016 NOA = Operating Assets - Operating Liabilities
Total assets 42,549 39,946 = $40,333 - $14,918
= $25,415
Operating 14,918 13,427
liabilities
Nonoperating
liabilities 21,315 17,197 2015 NOA = Operating Assets - Operating Liabilities
Total liabilities 36,233 30,624 = $38,223 - 13,427
= $24,796
Total
stockholders' 6,316 9,322
equity

Sales 88,519
Net operating
profit before 11,774
tax (NOPBT)
Nonoperting
expense before 753
tax

Tax expense 4,012

Net income 7,009


and February 1, 2015.
Compute Net Operating Profit after Tax
Selected balance sheet and income statement information for Home Depot follows.
$ millions Jan. 31, 2016 Feb. 01, 2015

Operating $40,333 $38,223


assets Compute net operating profit after tax for the year ended January 31, 2016. Assume a statutory tax rate o
Nonoperating 2,216 1,723
assets Round answer to the nearest whole number.
Total assets 42,549 39,946

NOPAT= Net Operating Profit Before Tax -


Operating
liabilities 14,918 13,427 = 11,774 -
Nonoperating
liabilities 21,315 17,197 = 7,483
Total liabilities 36,233 30,624

Total
stockholders' 6,316 9,322
equity

Tax on Operating Profit = Tax Expense +


Sales 88,519 = 4,012 +
Net operating
profit before 11,774
tax (NOPBT) = 4,291
Nonoperting
expense before 753
tax

Tax expense 4,012

Net income 7,009


ary 31, 2016. Assume a statutory tax rate of 37%.

Tax on Operating Profit


4,291

(Pretax Net Nonoperating Expense * Statutoru Tax Rate)


278.61
Compute ROE and RNOA with Disaggregation
Selected balance sheet and income statement information for Home Depot follows.
$ millions Jan. 31, 2016 Feb. 01, 2015

Operating $40,333 $38,223 Round all answers to two decimal places (ex: 0.12345 = 12.35%)
assets
Nonoperating 2,216 1,723 a. Compute return on equity.
assets
Total assets 42,549 39,946 ROE =

Operating 14,918 13,427


liabilities
Nonoperating 21,315 17,197
liabilities

Total liabilities 36,233 30,624


b. Compute return on net operating assets (RNOA).
RNOA =
Total
stockholders' 6,316 9,322
equity

Sales 88,519
Net operating
profit before 11,774
tax (NOPBT) c. Use ROE and RNOA to determine the nonoperating return for the year.
Nonoperting
expense before 753
tax Nonoperating Return =
Tax expense 4,012

Net income 7,009

d. Disaggregate RNOA into components of profitability and productivity and show that th
NOPM =
NOAT =
RNOA =
345 = 12.35%)

ng return for the year.

ity and productivity and show that the product of the two components equals RNOA.
Compute and Interpret RNOA, Profit Margin, and Asset Turnover of Competitors
Selected balance sheet and income statement information for drug store retailers CVS Health Corp. and Walgreens Boots Alliance follows.
2015 Net 2014 Net

2015 Operating Operating

Company ($
Ticker 2015 Sales NOPAT Assets Assets
millions)

CVS Health CVS $153,290 $5,758 $62,159 $48,338

Walgreens
WBA 103,444 3,642 42,683 22,461
Boots Alliance

a. Compute the 2015 return on net operating assets (RNOA) for each company.
Round answers to two decimal places (ex: 0.12345 = 12.35%)

b. Disaggregate RNOA into net operating profit margin (NOPM) and net operating asset turnover (NOAT) for each company.
Round answers to two decimal places (ex: 0.12345 = 12.35%)
oots Alliance follows.
Disaggregate Traditional DuPont ROE
Selected balance sheet and income statement information for Oracle Corporation follows. (Perform the required computations
$ millions 31-May-15 31-May-14
Operating $56,535 $51,447
assets a. Compute return on equity (ROE)

Nonoperating Round answer to two decimal places (ex: 0.12345 = 12.35%)


54,368 38,819
assets

Total assets 110,903 90,266 b. Apply the DuPont disaggregation into return on assets (ROA) and financial leverage (FL).
Rouand answers to two decimal places (percentage ex: 0.12345 = 12.35%)
Operating 19,847 18,722
liabilities

Nonoperating c. Calculate the profitability and productivity components of ROA.


41,958 24,097
liabilities
Rouand answers to two decimal places (percentage ex: 0.12345 = 12.35%)
Total liabilities 61,805 42,819

Total Oracle
stockholders' 48,663 46,878
equity

Total revenues 38,226

Operating
income before 13,871
tax
Nonoperting
expense before 1,037
tax

Tax expense 2,896

Net income 9,938


form the required computations from the perspective of an Oracle shareholder.

and financial leverage (FL).


Compute and Compare ROE, ROA, and RNOA
Selected balance sheet and income statement information for Oracle Corporation follows. (Perform the required computations
$ millions 31-May-15 31-May-14
Operating $56,535 $51,447
assets a. Compute return on equity (ROE)

Nonoperating Round answer to two decimal places (ex: 0.12345 = 12.35%)


54,368 38,819
assets

Total assets 110,903 90,266 b. Compute return on net assets (ROA)


Round answers to two decimal places (percentage ex: 0.12345 = 12.35%)
Operating 19,847 18,722
liabilities

Nonoperating c. Compute return on net operating assets (RNOA)


41,958 24,097
liabilities
Round answers to two decimal places (percentage ex: 0.12345 = 12.35%)
Total liabilities 61,805 42,819

Total Oracle
stockholders' 48,663 46,878
equity

Total revenues 38,226

Operating
income before 13,871
tax
Nonoperating
expense before 1,037
tax

Tax expense 2,896

Net income 9,938


form the required computations from the perspective of an Oracle shareholder.
Compute and Interpret Liquidity and Solvency Ratios
Selected balance sheet and income statement information from Comcast Corporation for 2015 and 2014 follows ($ millions).
Income
Total Current Total Current Before Interest Total Stockholders
Assets Liabilities Interest and Expense Liabilities* ' Equity
Taxes
2015 $12,303 $18,178 $15,673 $2,702 $112,596 $53,978

2014 13,531 17,410 15,001 2,617 106,118 53,068

a. Compute the current ratio for each year.


Round answers to two decimal places.

b. Compute times interest earned and the liabilities-to-equity ratio for each year.
Round answers to two decimal places.
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) 28-Aug-16 30-Aug-15 31-Aug-14

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 63

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

Costco Wholesale Corporation


Consolidated Balance Sheets
($ millions, except par value and share data) 28-Aug-16 30-Aug-15

Assets
Current assets
Cash and cash equivalents $3,379 $4,801
Short-term investments 1,350 1,618
Receivables, net 1,252 1,224
Merchandise inventories 8,969 8,908

Deferred income taxes and other current assets 268 228


Total current assets 15,218 16,779
Property and equipment
Land 5,395 4,961
Buildings and improvements 13,994 12,618
Equipment and fixtures 6,077 5,274

Construction in progress 701 811

Gross property and equipment 26,167 23,664


Less accumulated depreciation and amortization -9,124 -8,263

Net property and equipment 17,043 15,401

Other assets 902 837

Total assets $33,163 $33,017

Liabilities and equity


Current liabilities
Accounts payable $7,612 $9,011
Current portion long-term debt $1,100 $1,283
Accrued salaries and benefits 2,629 2,468
Accrued member rewards 869 813
Deferred membership fees 1,362 1,269

Other current liabilities 2,003 1,695

Total current liabilities 15,575 16,539


Long-term debt, excluding current portion 4,061 4,852

Other liabilities 1,195 783

Total liabilities 20,831 22,174

Equity
Preferred stock, $0.005 par value:
100,000,000 shares authorized; no shares
0 0
issued and outstanding
Common stock, $0.005 par value:
900,000,000 shares authorized;
437,524,000 and 437,952,000 shares issued
2 2
and outstanding
Additional paid-in-capital 5,490 5,218
Accumulated other comprehensive loss -1,099 -1,121

Retained earnings 7,686 6,518

Total Costco stockholders’ equity 12,079 10,617


Noncontrolling interests 253 226

Total equity 12,332 10,843

Total liabilities and equity $33,163 $33,017


(a) Compute net operating profit after tax (NOPAT) for 2016. Assume that the combined federal and state s

Nonoperating expense 53
Marginal tax rate 0.37
tax shield at 37% 19.61

Income tax expense 1,243


Add tax shield 19.6
Tax on Operating Activities 1,263

Net Operating Profit Before Tax (NOP 3,672


Tax on Operating Activities 1,263
Net Operating Profit After Tax (NOPAT 2,409

(b) Compute net operating assets (NOA) for 2016 and 2015.
2016 NOA $12,764
2015 NOA $10,559

(c) Compute Costco’s RNOA, net operating profit margin (NOPM) and net operating asset turnover (NOAT

Nonoperating expense 53
Marginal tax rate 0.37
tax shield at 37% 19.61

Income tax expense 1,243


Add tax shield 19.61
Tax on Operating Activities 1,263

Net Operating Profit Before Tax (NOP 3,672


Tax on Operating Activities 1,263
Net Operating Profit After Tax (NOPAT 2409.39

2016 RNOA 20.66%

2016 NOPM 2.03%


2016 NOAT 10.18

(d) Compute net nonoperating obligations (NNO) for 2016 and 2015.

2016 Nonoperating Liabilities $5,161


2016 Nonoperating Assets $4,729
2016 NNO $432

2015 Nonoperating Liabilities $6,135


2015 Nonoperating Assets $6,419
2015 NNO ($284)

(e) Compute return on equity (ROE) for 2016. (Do not round until final answer. Round answer two decima
ROE 20.71%

(f) Infer the nonoperating return component of ROE for 2016. (Use answers from above to calculate. Roun
Nonoperting Return = ROE - RNOA 0.05%

(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 grea
ROE > RNOA implies that Costco increased its financial leverage during the period.
e combined federal and state statutory tax rate is 37%. (Round to the nearest whole number.)

perating asset turnover (NOAT) for 2016. (Do not round until final answer. Round two decimal places. Do not use NOPM x NO
er. Round answer two decimal places)

from above to calculate. Round two decimal places.)

use of equity capital?

g assets that yield a return greater than its cost of debt.


Do not use NOPM x NOAT to calculate RNOA)
Analysis and Interpretation of Liquidity and Solvency
Balance sheets and income statements for Costco Wholesale Corporation follow.
Costco Wholesale Corporation
Consolidated Statements of Earnings

For Fiscal Years Ended ($ millions) 28-Aug-16 30-Aug-15 31-Aug-14

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 63

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

Costco Wholesale Corporation


Consolidated Balance Sheets
($ millions, except par value and share data) 28-Aug-16 30-Aug-15

Assets
Current assets
Cash and cash equivalents $3,379 $4,801
Short-term investments 1,350 1,618
Receivables, net 1,252 1,224
Merchandise inventories 8,969 8,908

Deferred income taxes and other current assets 268 228


Total current assets 15,218 16,779
Property and equipment
Land 5,395 4,961
Buildings and improvements 13,994 12,618
Equipment and fixtures 6,077 5,274

Construction in progress 701 811

Gross property and equipment 26,167 23,664


Less accumulated depreciation and amortization -9,124 -8,263

Net property and equipment 17,043 15,401

Other assets 902 837

Total assets $33,163 $33,017

Liabilities and equity


Current liabilities
Accounts payable $7,612 $9,011
Current portion long-term debt $1,100 $1,283
Accrued salaries and benefits 2,629 2,468
Accrued member rewards 869 813
Deferred membership fees 1,362 1,269

Other current liabilities 2,003 1,695

Total current liabilities 15,575 16,539


Long-term debt, excluding current portion 4,061 4,852

Other liabilities 1,195 783

Total liabilities 20,831 22,174

Equity
Preferred stock, $0.005 par value:
100,000,000 shares authorized; no shares issued and outstand 0 0
Common stock, $0.005 par value:
900,000,000 shares authorized;
437,524,000 and 437,952,000 shares issued and outstanding 2 2
Additional paid-in-capital 5,490 5,218
Accumulated other comprehensive loss -1,099 -1,121

Retained earnings 7,686 6,518

Total Costco stockholders’ equity 12,079 10,617

Noncontrolling interests 253 226


Noncontrolling interests 253 226

Total equity 12,332 10,843

Total liabilities and equity $33,163 $33,017


(a) Compute Costco’s current ratio and quick ratio for 2016 and 2015. (Round answers two decimal places
2016 Current Ratio 0.98
2015 Current Ratio 1.01

2016 Quick Ratio 0.38


2015 Quick Ratio 0.46

(b) Compute Costco’s times interest earned and its liabilities-to-equity ratios for 2016 and 2015. (Round an
2016 Times Interest 27.61
2015 Times Interest 29.23

2016 Liabilities-to-Equi 1.69


2015 Liabilities-to-Equi 2.05

(c) Which of the following statements best describes Costco's liquidity or solvency?
Costco's liabilities-to-equity ratio increased during 2016 thus its solvency has improved.
Costco's times interest earned is high thus there is concern for Costco's solvency.
Costco's quick and current ratios slightly increased therefore its liquidity has declined.
Costco's times interest earned ratio is high thus solvency is not a concern for Costco.
nd answers two decimal places.)

for 2016 and 2015. (Round answers two decimal places.)

s improved.