Direct Computation of Nonoperating Return Balance sheets and income statements f

Question

Direct Computation of Nonoperating Return Balance sheets and income statements for Costco Wholesale Corporation follow.

(a) Compute the following for Costco. Hint: RNOA is 21.78% and NOPAT is $2,062. Rounding instructions: Do not round until your final answer. Round FLEV and NCI ratio four decimal places. Round Spread and NNEP two decimal places. Remember to use negative signs in answers when appropriate.

2013 NNO (Net non-operating obligations) =$Answer
2012 NNO (Net non-operating obligations) =$Answer

2013 NNE (Net non-operating expense) =$Answer
2013 NNEP (Net non-operating expense percent) =Answer%

2013 FLEV =Answer
2013 Spread =Answer%
2013 NCI ratio =Answer

(b) Assume that Costco's return on equity (ROE) for 2013 is 17.58% and its return on net operating assets (RNOA) is 21.78%. Confirm computations to yield the relation:
ROE = [RNOA + (FLEV X Spread)] X NCI ratio.
2013 ROE =Answer% = [Answer%+(Answer X Answer)] X Answer


(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 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 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 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 positive - meaning its non-operating liabilities exceed its non-operating assets. Costco will need to rely on debt to finance new opportunities.

Consolidated Statements of Earnings For Fiscal Years Ended ($ millions) September 1, 2013 September 2, 2012 August 28, 2011 Revenue Net Sales $102,870 $97,062 $87,048 Membership fees 2,286 2,075 1,867 Total revenue 105,156 99,137 88,915 Operating expenses Merchandise costs 91,948 86,823 77,739 Selling, general and administrative 10,104 9,518 8,691 Preopening expenses 51 37 46 Operating Income 3,053 2,759 2,439 Other income (expense) Interest expense (99) (95) (116) Interest income and other, net 97 103 60 Income before income taxes 3,051 2,767 2,383 Provision for income taxes 990 1,000 841 Net income including noncontrolling interests 2,061 1,767 1,542 Net income attributable to noncontrolling interests (22) (58) (80) Net income attributable to Costco $ 2,039 $ 1,709 $ 1,462

Explanation / Answer

a.

NNO =Long term debt – (Cash + Short term investments)

2013 NNO = $4,998 – ($4,644 + $1,480)

2013 NNO = $4,998 - $6,124

2013 NNO = ($1,126)

2012 NNO = $1,381 – ($3,528 + $1,326)

2012 NNO = $1,381 - $4,854

2012 NNO = ($3,473)

NOPAT = Operating Income – (Income taxes + (Interest income – Interest expense) x tax rate

NOPAT = $3,053 – (990 + (99 - 97) x 0.37)

NOPAT = $2,062

2013 NNE = NOPAT - Net Income

2013 NNE = $2,062 - $2,061

2013 NNE = $1

NNEP = NNE/Average NNO

2013 NNEP = $1/[(($1,126) + ($3,473))/2]

2013 NNEP = (0.04%)

FLEV = Average NNO/Average equity

2012 FLEV = [(($1,126) + ($3,473))/2] / [($11,012 + $12,518)/2]

2012 FLEV = (0.1955)

Spread = RNOA – NNEP

2013 Spread = 21.78% - (0.04%)

2013 Spread = 21.82%

NCI ratio = (Net Income attributable to Costco/Net income)/(Average equity/Average stockholders’ equity)

NCI ratio = ($2,039/$2,061)/[($10,833+$12,361)/2]/[($11,012+$12,518)/2]

NCI ratio = 0.989326/0.98572

NCI ratio = 1.0037

b.

ROE = [RNOA + (FLEV X Spread)] X NCI ratio

ROE = [21.78% + ((0.1955 x 21.82%)] x 1.0037

ROE = 17.58%

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