Deck 4: Analyzing and Interpreting Financial Statements

Question 1

Highly leveraged firms have higher RNOA than firms with lower leverage.

Answer 1

False

Question 2

Repurchasing shares near year-end will increase a firm's return on equity (ROE).

Answer 2

True

Question 3

All else equal, when investors consider a firm's return on equity (ROE) they consider less risky a firm that earns proportionately more of that return from operating activities as opposed to nonoperating activities.

Answer 3

True

Question 4

To determine tax on net operating profit, we begin with total tax expense and deduct taxes related to net nonoperating expenses.

Question 5

Increasing a company's net operating asset turnover (NOAT) increases both RNOA and ROE.

Question 6

If Company A has a higher net operating profit margin (NOPM) than Company B, then Company A's RNOA will be higher.

Question 7

Net operating asset turnover (NOAT) measures a company's profitability.

Question 8

ROE can be disaggregated into operating and nonoperating returns. Nonoperating return will be positive as long as Spread is positive.

Question 9

A current ratio greater than 1.0 is generally desirable for a company.

Question 10

The only difference between return on assets (ROA) and return on net operating assets (RNOA) is that the denominator in RNOA is typically smaller than the denominator in ROA because the former is net of operating liabilities.

Question 11

The DuPont analysis disaggregates return on equity into profitability, productivity, and leverage components.

Question 12

ROE is computed as:

A) Net income attributable to controlling interest / Average equity attributable to controlling interest
B) Net income attributable to controlling interest / Net sales
C) [RNOA + (FLEV × Spread)] x NCI ratio
D) A and B
E) A and C

Question 13

The 2016 balance sheet of E.I. du Pont de Nemours and Company shows average DuPont shareholders' equity attributable to controlling interest of $9,996 million, net operating profit after tax of $2,308 million, net income attributable to DuPont of $2,513 million, and common shares issued of 950.044 million.
Assume the company has no preferred shares issued. DuPont's return on equity (ROE) for the year is:

A) 30.7%
B) 37.6%
C) 25.1%
D) 36.4%
E) There is not enough information to calculate the ratio.

Question 14

The 2016 financial statements of The New York Times Company reveal average shareholders' equity attributable to controlling interest of $837,283 thousand, net operating profit after tax of $48,032 thousand, net income attributable to The New York Times Company of $29,068 thousand, and average net operating assets of $354,414 thousand.
The company's return on equity (ROE) for the year is:

A) 3.5%
B) 13.8%
C) 6.9%
D) 14.3%
E) There is not enough information to calculate the ratio.

Question 15

The 2017 balance sheet of Staples, Inc. shows total assets of $8,271 million, operating assets of $6,566 million, operating liabilities of $3,527 million, and shareholders' equity of $3,688 million.
Staples' 2017 net operating assets are:

A) $11,798 million
B) $ 6,566 million
C) $ 4,744 million
D) $ 3,039 million
E) None of the above

Question 16

The 2016 balance sheet of Whole Foods Market reports operating assets of $5,489 million, operating liabilities of $2,066 million, and total liabilities of $3,117 million.
Whole Food's average net operating assets are:

A) $3,423 million
B) $2,372 million
C) $3,562 million
D) $2,510 million
E) There is not enough information to calculate the amount.

Question 17

Mattel Inc.'s 2016 financial statements show operating profit before interest and tax of $519,233 thousand, net income of $318,022 thousand, provision for income taxes of $91,720 thousand and net nonoperating expense before tax of $109,491 thousand.
Assume Mattel's statutory tax rate for 2016 is 37%. Mattel's 2016 tax shield is:

A) $ 68,979 thousand
B) $ 40,512 thousand
C) $ 277,510 thousand
D) $ 186,460 thousand
E) None of the above

Question 18

Mattel Inc.'s 2016 financial statements show operating profit before interest and tax of $519,233 thousand, net income of $318,022 thousand, provision for income taxes of $91,720 thousand and net nonoperating expense before tax of $109,491 thousand. Assume Mattel's statutory tax rate for 2016 is 37%.
Mattel's 2016 effective tax rate is:

A) 22.4%
B) 37.0%
C) 19.4%
D) 17.7%
E) None of the above

Question 19

Net operating profit after tax (NOPAT) includes operating revenues less expenses such as:

A) Cost of goods sold (COGS)
B) Taxes on operating income
C) Selling, general and administrative expenses (SG&A)
D) After-tax earnings from investments and interest expenses
E) All of the above
F) A, B and C only

Question 20

The 2016 financial statements of The New York Times Company reveal average shareholders' equity attributable to controlling interest of $837,283 thousand, net operating profit after tax of $48,032 thousand, net income attributable to The New York Times Company of $29,068 thousand, and average net operating assets of $354,414 thousand.
The company's return on net operating assets (RNOA) for the year is:

A) 3.5%
B) 6.9%
C) 13.6%
D) 18.7%
E) There is not enough information to calculate the ratio.

Question 21

The fiscal 2016 financial statements of Nike Inc. shows net operating profit margin (NOPM) of 11.4%, net operating asset turnover (NOAT) of 3.83, return on equity of 30.1%, and adjusted return on assets of 17.1%.
What is the company's nonoperating return?

A) (13.6)%
B) 18.7%
C) (14.5)%
D) 35.4%
E) There is not enough information to calculate the ratio.

Question 22

The 2016 balance sheet of The New York Times Company shows net operating profit margin (NOPM) of 3.1%, net operating asset turnover (NOAT) of 4.39, return on equity of 3.5%, and adjusted return on assets of 2.2%.
What is the company's nonoperating return?

A) (24.0)%
B) 7.9%
C) (1.1)%
D) (10.1)%
E) None of the above

Question 23

The fiscal year-end 2016 financial statements for Walt Disney Co. report revenues of $55,632 million, net operating profit after tax of $9,954 million, net operating assets of $58,603 million. The fiscal year-end 2015 balance sheet reports net operating assets of $59,079 million.
Walt Disney's 2016 net operating profit margin is:

A) 16.9%
B) 12.5%
C) 17.9%
D) 11.7%
E) There is not enough information to calculate the ratio.

Question 24

The fiscal 2016 financial statements for Walgreens Boots Alliance, Inc., report net sales of $117,351 million, net operating profit after tax of $4,687 million, net operating assets of $39,502 million. The 2015 balance sheet reports net operating assets of $42,683 million.
Walgreen's 2016 net operating asset turnover is:

A) 11.5%
B) 2.86
C) 13.3%
D) 2.97
E) There is not enough information to calculate the ratio.

Question 25

Kroger's 2016 financial statements show net operating profit after tax of $2,286 million, net income of $1,975 million, sales of $115,337 million, and average net operating assets of $18,616 million.
Kroger's net operating asset turnover for the year is:

A) 12.3%
B) 8.11
C) 6.20
D) 10.9%
E) There is not enough information to calculate the ratio.

Question 26

The 2016 balance sheet of Microsoft Corp. reports total assets of $193,694 million, operating liabilities of $68,010 million, and total shareholders' equity of $71,997 million.
Microsoft 2016 nonoperating liabilities are:

A) $140,007 million
B) $ 53,687 million
C) $ 68,010 million
D) $121,697 million
E) There is not enough information to calculate the amount.

Question 27

The fiscal 2016 financial statements of Nike Inc. shows average net operating assets (NOA) of $8,450 million, average net nonoperating obligations (NNO) of $(4,033) million, average total liabilities of $9,014 million, and average equity of $12,483 million.
The company's 2016 financial leverage (FLEV) is:

A) (0.477)
B) (0.559)
C) (0.323)
D) (0.447)
E) There is not enough information to determine the ratio.

Question 28

The fiscal 2017 financial statements of Reed Enterprises shows average net operating assets (NOA) of $4,795 million, average net nonoperating obligations (NNO) of $605 million, average total liabilities of $6,330 million, and year-end equity of $5,240 million.
The company's 2017 financial leverage (FLEV) is:

A) 0.144
B) 0.126
C) 0.115
D) 0.091
E) There is not enough information to determine the ratio.

Question 29

Liquidity refers to:

A) A company's operating cycle
B) A company's ability to general sales from use of its assets
C) A company's ability to meet its debt obligations
D) A company's amount of financial leverage
E) A company's cash availability

Question 30

The current ratio is used to assess:

A) Solvency
B) Bankruptcy position
C) Liquidity
D) Financial leverage
E) None of the above

Question 31

Which of the following is a measure of liquidity?

A) Liabilities-to-Equity Ratio = Total Liabilities / Stockholder's Equity
B) Times Interest Earned = Earnings before interest and taxes / Interest Expense
C) Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
D) Return on net operating assets (RNOA)
E) All of the above

Question 32

The fiscal 2016 balance sheet for Whole Foods Market reports the following data (in millions). What is the company's current ratio?

A) 0.69
B) 1.38
C) 0.72
D) 1.47
E) None of the above

Question 33

The fiscal 2016 balance sheet for Whole Foods Market reports the following data (in millions). What is the company's quick ratio?

A) 0.69
B) 1.38
C) 0.72
D) 1.47
E) None of the above

Question 34

Selected income statement data follow for Harley Davidson, Inc., for the year ended December 31, 2016 (in thousands). What is the company's times interest earned ratio?

A) 34.5
B) 24.3
C) 17.8
D) 35.5
E) None of the above

Question 35

Selected balance sheet data follow for Goodyear Tire & Rubber Company for the year ended December 31, 2016 (in millions). What is the company's liabilities-to-equity ratio?

A) 2.49
B) 1.40
C) 3.23
D) 0.71
E) None of the above

Question 36

Selected ratios follow for Nike, Inc. for the year ended December 31, 2016 (in millions). What is the company's return on equity (ROE) for the year?

A) 13.1%
B) 32.2%
C) 17.5%
D) 30.1%
E) None of the above

Question 37

Selected balance sheet and income statement data follow for E.I. DuPont de Nemours and Company (in millions). Use the data to calculate the following:
a. Return on equity (ROE)
b. Return on net operating assets (RNOA)
c. The company's nonoperating return

Question 38

Selected balance sheet and income statement data follow for The New York Times Company for fiscal 2016 (in thousands). Use the data to calculate the following:
a. Return on equity (ROE)
b. Return on net operating assets (RNOA)
c. The company's nonoperating return

Question 39

Use the income statement for Microsoft Corporation to compute the following:
a. Tax shield
b. The tax on operating profit
c. NOPAT
The company's combined federal and state statutory tax rate is 37.0%.

Question 40

Use the income statement for Microsoft Corporation to compute the following:
a. Tax shield
b. The tax on operating profit
c. NOPAT
The company's combined federal and state statutory tax rate is 37.0%.

Question 41

Use Microsoft's balance sheets for the fiscal year 2016 to compute the following (assume equity and other investments is operating):
a. Operating assets
b. Operating liabilities
c. Net operating assets (NOA)

Question 42

Use the following income statement for Mattel Inc. ($ thousands) to compute the following:
a. Tax shield
b. Taxes on operating profit
c. Tax rate on operating profit
The company's statutory tax rate is 37%.

Question 43

Selected balance sheet and income statement data follow for Staples, Inc. (in millions). Use the data to calculate a) return on net operating assets (RNOA), b) net operating profit margin (NOPM), and c) net operating asset turnover (NOAT) for fiscal 2015.

Question 44

Selected balance sheet and income statement data follow for Walgreens Boots Alliance, Inc. for the year ended August 31, 2016 (in millions). Use the data to calculate a) return on net operating assets (RNOA), b) net operating profit margin (NOPM), and c) net operating asset turnover (NOAT). Confirm that RNOA = NOPM × NOAT.

Question 45

Selected income statement and balance sheet data follow for Snap-On Incorporated for fiscal 2016 and 2015. Use these data to calculate a) FLEV, b) spread, and c) return on equity (ROE) for fiscal 2016 only.

Question 46

Selected balance sheet income statement data follow for Whole Foods Market, Inc. for the year ended September 25, 2016 (in millions). Use the data to calculate the company's current ratio and quick ratio.

Question 47

Selected balance sheet and income statement data follow for Harley Davidson, Inc. for the year ended December 31, 2016 (in thousands). Use the data to calculate a) times interest earned, and b) liabilities-to-equity ratio

Question 48

Selected balance sheet and income statement data follow for Goodyear Tire & Rubber Company for the year ended December 31, 2016 (in millions). Use the data to calculate the company's current ratio and liabilities-to-equity ratio.

Question 49

Use the following selected balance sheet and income statement data for Mattel Inc. (in $ thousands) to compute a) return on equity, b) profit margin (PM), c) asset turnover (AT), and d) financial leverage (FL) for fiscal 2016. Show that ROE = PM × AT × FL.

Question 50

Use the following selected balance sheet and income statement data for Valero Energy Corporation (in $ millions) to compute a) return on equity, b) profit margin (PM), c) asset turnover (AT), and d) financial leverage (FL) for fiscal 2016. Show that ROE = PM × AT × FL.

Question 51

Income statements and balance sheets follow for The New York Times Company. Refer to these financial statements to answer the requirements.


Required:
a. Compute net operating profit after tax (NOPAT) for 2016 and 2015. Assume that combined federal and state statutory tax rates are 37% for both years.
b. Compute net operating assets (NOA) for 2016 and 2015.
c. Compute return on net operating assets (RNOA) for 2016 and 2015. Net operating assets are $397,299 thousand in 2014.
d. Compute return on common shareholders equity (ROE) for 2016 and 2015. Stockholders' equity attributable to New York Times Company in 2014 is $726,328 thousand.
e. What is nonoperating return component of ROE for 2016 and 2015?
f. Comment on the difference between ROE and RNOA. What inference do you draw from this comparison?

Question 52

Income statements and balance sheets follow for Snap-On Incorporated. Refer to these financial statements to answer the requirements.


Required:
a. Compute net operating profit after tax (NOPAT) for 2016 and 2015. Assume that combined federal and state statutory tax rates are 37% for fiscal 2016 and 2015.
b. Compute net operating assets (NOA) for 2016 and 2015.
c. Compute return on net operating assets (RNOA) for 2016 and 2015. Net operating assets are $3,011.7 million in 2014.
d. Compute return on equity (ROE) for 2016 and 2015. (Stockholders' equity attributable to Snap-On in 2014 is $2,207.8 million.)
e. What is nonoperating return component of ROE for 2016 and 2015?
f. Comment on the difference between ROE and RNOA. What inference do you draw from this comparison?

Question 53

Income statements and balance sheets follow for E.I. DuPont de Nemours and Company. Refer to these financial statements to answer the requirements.

Required
a. Compute net operating profit after tax (NOPAT) for 2016 and 2015. Assume that combined federal and state statutory tax rate is 37% for both years.
b. Compute net operating assets (NOA) for 2016 and 2015.
c. Compute return on net operating assets (RNOA) for 2016 and 2015. Net operating assets are $13,239 million in 2014.
d. Compute return on equity (ROE) for 2016 and 2015. DuPont Stockholders' equity in 2014 is $13,320 million.
e. What is nonoperating return component of ROE for 2016 and 2015?
f. Comment on the difference between ROE and RNOA. What inference do you draw from this comparison?

Question 54

Income statements and balance sheets follow for Microsoft Corporation. Refer to these financial statements to answer the requirements.
Required:
a. Compute net operating profit after tax (NOPAT) for 2016 and 2015. Assume that combined federal and state statutory tax rates are 37% for both years.
b. Compute net operating assets (NOA) for 2016 and 2015. Assume Equity and other investments are operating assets.
c. Compute return on net operating assets (RNOA) for 2016 and 2015. Net operating assets are $26,720 million in 2014.
d. Compute return on equity (ROE) for 2016 and 2015. (Stockholders' equity in 2014 is $89,784 million.)
e. What is nonoperating return component of ROE for 2016 and 2015?
f. Comment on the difference between ROE and RNOA. What inference do you draw from this comparison

Question 55

Income statements and balance sheets follow for The New York Times Company. Refer to these financial statements to answer the requirements.

Required:
a. Compute net operating profit after tax (NOPAT) for 2016 and 2015. Assume that combined federal and state statutory tax rates are 37% for both years.
b. Compute net operating assets (NOA) for 2016 and 2015.
c. Compute return on net operating assets (RNOA) for 2016 and 2015. Comment on the year-over-year change. Net operating assets are $397,299 thousand in 2014.
d. Disaggregate RNOA into profitability and asset turnover components (NOPM and NOAT, respectively). What explains the year-over-year change in RNOA?

Question 56

Income statements and balance sheets follow for Snap-On Incorporated. Refer to these financial statements to answer the requirements.
Required:
a. Compute net operating profit after tax (NOPAT) for 2016 and 2015. Assume that combined federal and state statutory tax rate is 37% for both fiscal years.
b. Compute net operating assets (NOA) for 2016 and 2015.
c. Compute return on net operating assets (RNOA) for 2016 and 2015. Comment on the year-over-year change. Net operating assets are $3,011.7 million in 2014.
d. Disaggregate RNOA into profitability and asset turnover components (NOPM and NOAT, respectively). Remember to include both net sales and financial services revenue in total revenue. What explains the year-over-year change in RNOA?

Question 57

Income statements and balance sheets follow for Snap-On Incorporated. Refer to these financial statements to answer the requirements.
Required:
a. Compute net nonoperating expenses (NNE) for 2016 and 2015. Assume that combined federal and state statutory tax rate is 37% for both fiscal years.
b. Compute net nonoperating obligations (NNO) for 2016 and 2015.
c. Compute Spread for 2016 and 2015. Return on net operating assets is 17.5% and 16.8% in 2016 and 2015, respectively. In 2014, net nonoperating obligations were $786.4 million.
d. Compute FLEV for 2016 and 2015. In 2014, net nonoperating obligations were $786.4 million and total shareholders' equity was $2,225.3 million.
e. Calculate return on equity (ROE) for both years. Show that ROE = RNOA + (FLEV × Spread) x NCI ratio. Interpret the year-over-year change in ROE. (Hint: consider the changes in both FLEV and Spread.) In 2014, shareholders' equity attributable to Snap-On was $2,207.8 and total shareholders' equity was $2,225.3.

Question 58

Income statements and balance sheets follow for Microsoft Corporation. Refer to these financial statements to answer the requirements.
Required:
a. Compute net nonoperating expenses (NNE) for 2016 and 2015. Assume that combined federal and state statutory tax rates are 37% for both years.
b. Compute net nonoperating obligations (NNO) for 2016 and 2015.
c. Compute Spread for 2016 and 2015. Return on net operating assets (RNOA) is 109.1% and 52.6% in 2016 and 2015, respectively. NNO were $(63,064) million in 2014.
d. Compute FLEV for 2016 and 2015. In 2014, net nonoperating obligations (assets) were $(63,064) million and shareholders' equity was $89,784 million.
e. Calculate return on equity (ROE) for both years. Show that ROE = RNOA + (FLEV × Spread). Interpret the year-over-year change in ROE.

Question 59

Income statements and balance sheets follow for Snap-On Incorporated. Refer to these financial statements to answer the requirements.
Required:
a. Compute the company's current ratio and quick ratio for fiscal 2016 and 2015. Comment on any observed trend.
b. Compute the company's times interest earned and liabilities-to-equity ratio for 2016 and 2015. Comment on any observed trend.
c. Summarize your findings in a conclusion about the company's liquidity and solvency. Do you have any concerns about the company's ability to meet its debt obligations?

Question 60

Income statements and balance sheets follow for Microsoft Corporation and Apple Inc. Refer to these financial statements to answer the requirements.

Required:
a. Compute the current ratio and quick ratio for both firms for fiscal 2016. Compare the ratios and determine which company is more liquid.
b. Compute the times interest earned and liabilities-to-equity ratios for both firms for fiscal 2016. Which company is more solvent?
c. Do you have any concerns about either company's ability to meet its debt obligations? Explain.

Question 61

Use the following balance sheets and income statements for Valero Energy Corporation to answer the requirements.
Required:
a. Compute Valero's return on equity (ROE) for 2016 and 2015. Valero Energy stockholders' equity in 2014 was $20,677 million.
b. Compute the profit margin (PM), asset turnover (AT), and financial leverage (FL) components of the basic DuPont model. Show that ROE = PM × AT × FL for 2016. Total assets were $45,550 million in 2014. Which component(s) explain the year over year change in Valero's ROE?
c. Compute adjusted return on assets (ROA) for 2016 and 2015. Assume a tax rate of 37% for both years.

Question 62

Explain the trade-off between net operating profit margin and net operating asset turnover.

Question 63

Explain how return on net operating assets (RNOA) and financial leverage (FLEV) affect Return on Equity (ROE). Is greater FLEV always better?

Question 64

What is liquidity? Identify and discuss two ways to measure a company's liquidity.

Question 65

What is solvency? Identify and discuss two ways a company's solvency is measured.

Question 66

What is the difference between the traditional ROA measure (part of the traditional DuPont analysis) and the return on net operating assets (RNOA)?