Analysis and Interpretation of Liquidity and Solvency Balance sheets and income

Question

Analysis and Interpretation of Liquidity and Solvency
Balance sheets and income statements for Costco Wholesale Corporation follow.

(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 =$Answer million
2015 NNO =$Answer million  

2016 NNE =$Answer million
2016 NNEP =Answer% Round NNEP to two decimal places.   

2016 FLEV        = Answer  Round FLEV to four decimal places.   
2016 Spread    = Answer% Round Spread to two decimal places.
2016 NCI ratio = Answer 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) is 20.66%. Confirm computations to yield the relation: ROE = [RNOA + (FLEV X Spread)] X NCI ratio.

2016 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 cash and short term investments to use for new opportunities.

Costco's FLEV is positive - meaning its non-operating liabilities exceed its non-operating assets. Costco has a high level of cash and short term investments to use for new opportunties.

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 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

Explanation / Answer

11348

FLEV = Avg NNO/Avg SE 1.2935319 NNO 28-Aug-16 30-Aug-15 ST debt 14475 15256 Current portion of LT debt 1100 283 LT debt 4061 4852 NC interest of equity 253 226 Less: Cash -3379 -4801 ST Invest -1350 -1618 15160 14198 Avg NNo 14679 SE (Excluding NCI) 12079 10617 Average SE

11348

28-Aug-16 30-Aug-15 NCI 253 226

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