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16/12/2020 Client: saad24vbs Deadline: 7 Days

Question 1.Analysis and Interpretation of Profitability Balance sheets and income statements for Target Corporation follow.


Income Statement


For Fiscal Years Ended ($ millions)


2008


2007


2006


Sales


$ 61,471


$ 57,878


$ 51,271


Credit card revenues


1,896


1,612


1,349


Total revenues


63,367


59,490


52,620


Cost of sales


41,895


39,399


34,927


Selling, general and administrative expenses


13,704


12,819


11,185


Credit card expenses


837


707


776


Depreciation and amortization


1,659


1,496


1,409


Earnings before interest and income taxes


5,272


5,069


4,323


Net interest expense


647


572


463


Earnings before income taxes


4,625


4,497


3,860


Provisions for income taxes


1,776


1,710


1,452


Net earnings


$ 2,849


$ 2,787


$ 2,408




Balance Sheet


($ millions, except footnotes)


February 2, 2008


February 3, 2007


Assets






Cash and cash equivalents


$ 2,450


$ 813


Credit card receivables


8,054


6,194


Inventory


6,780


6,254


Other current assets


1,622


1,445


Total current assets


18,906


14,706


Property and equipment






Land


5,522


4,934


Buildings and improvements


18,329


16,110


Fixtures and equipment


3,858


3,553


Computer hardware and software


2,421


2,188


Construction-in-progress


1,852


1,596


Accumulated depreciation


(7,887)


(6,950)


Property and equipment, net


24,095


21,431


Other noncurrent assets


1,559


1,212


Total assets


$ 44,560


$ 37,349


Liabilities and shareholders' investment






Accounts payable


$ 6,721


$ 6,575


Accrued and other current liabilities


3,097


3,180


Current portion of long-term debt and notes payable


1,964


1,362


Total current liabilities


11,782


11,117


Long-term debt


15,126


8,675


Deferred income taxes


470


577


Other noncurrent liabilities


1,875


1,347


Shareholders' investment






Common stock


68


72


Additional paid-in-capital


2,656


2,387


Retained earnings


12,761


13,417


Accumulated other comprehensive income (loss)


(178)


(243)


Total shareholders' investment


15,307


15,633


Total liabilities and shareholders' equity


$ 44,560


$ 37,349


(a) Compute net operating profit after tax (NOPAT) for 2008. Assume that the combined federal and statutory rate is: 39%. (Round your answer to the nearest whole number.)


2008 NOPAT = Answer ($ millions) (b) Compute net operating assets (NOA) for 2008 and 2007.


2008 NOA = Answer ($ millions) 2007 NOA = Answer ($ millions)


(c) Compute Target's RNOA, net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2008. (Do not round until final answer. Round two decimal places. Do not use NOPM x NOAT to calculate RNOA.)


2008 RNOA = Answer% 2008 NOPM = Answer% 2008 NOAT = Answer


(d) Compute net nonoperating obligations (NNO) for 2008 and 2007.


2008 NNO = Answer ($ millions) 2007 NNO = Answer ($ millions) (e) Compute return on equity (ROE) for 2008. (Round your answers to two decimal places. Do not round until your final answer.)


2008 ROE = Answer% (f) Infer the nonoperating return component of ROE for 2008. (Use answers from above to calculate. Round your answer to two decimal places.)


2008 nonoperating return = Answer% (g) Which of the following statements reflects the best inference we can draw from the difference between Target's ROE and RNOA?


ROE > RNOA implies that Target has increased its financial leverage during the period.


ROE > RNOA implies that Target is able to borrow money to fund operating assets that yield a return greater than its cost of debt; the excess accrues to the benefit of Target's stockholders.


ROE > RNOA implies that Target's equity has grown faster than its NOA.


ROE > RNOA implies that Target has taken on too much financial leverage.


Question 2.Top of Form


Analysis and Interpretation of Profitability Balance sheets and income statements for Target Corporation follow.


Income Statement


For Fiscal Years Ended ($ millions)


2006


2005


2004


Sales


$ 51,271


$ 45,682


$ 40,928


Credit card revenues


1,349


1,157


1,097


Total revenues


52,620


46,839


42,025


Cost of sales


34,927


31,445


28,389


Selling, general and administrative expenses


11,185


9,797


8,657


Credit card expenses


776


737


722


Depreciation and amortization


1,409


1,259


1,098


Earnings before interest and income taxes


4,323


3,601


3,159


Net interest expense


463


570


556


Earnings before income taxes


3,860


3,031


2,603


Provisions for income taxes


1,452


1,146


984


Net earnings


$ 2,408


$ 1,885


$ 1,619




Balance Sheet


($ millions, except footnotes)


January 28, 2006


January 29, 2005


Assets






Cash and cash equivalents


$ 1,648


$ 2,245


Credit card receivables


5,666


5,069


Inventory


5,838


5,384


Other current assets


1,253


1,224


Total current assets


14,405


13,922


Property and equipment






Land


4,449


3,804


Buildings and improvements


14,174


12,518


Fixtures and equipment


3,219


2,990


Computer hardware and software


2,214


1,998


Construction-in-progress


1,158


962


Accumulated depreciation


(6,176)


(5,412)


Property and equipment, net


19,038


16,860


Other noncurrent assets


1,552


1,511


Total assets


$ 34,995


$ 32,293


Liabilities and shareholders' investment






Accounts payable


$ 6,268


$ 5,779


Accrued and other current liabilities


2,567


1,937


Current portion of long-term debt and notes payable


753


504


Total current liabilities


9,588


8,220


Long-term debt


9,119


9,034


Deferred income taxes


851


973


Other noncurrent liabilities


1,232


1,037


Shareholders' investment






Common stock


73


74


Additional paid-in-capital


2,121


1,810


Retained earnings


12,013


11,148


Accumulated other comprehensive income (loss)


(2)


(3)


Total shareholders' investment


14,205


13,029


Total liabilities and shareholders' equity


$ 34,995


$ 32,293


(a) Apply the basic DuPont model and compute the component measures for profit margin, asset turnover, and financial leverage. (Do not round until your final answer. Round your answers to two decimal places.) Net profit margin =Answer% Asset turnover =Answer Financial leverage =Answer (b) Compute ROE using financial information provided in the balance sheet and income statement. Do not use ROE = PM x AT x FL. (Do not round until your final answer. Round your answer to two decimal places.) ROE =Answer% (c) Compute adjusted ROA. Assume a tax rate of: 38.3%. (Do not round until your final answer. Round your answer to two decimal places.) Adjusted ROA =Answer%


Question 3.


Interpreting Accounts Receivable and Its Footnote Disclosure Following is the current asset section from the W.W. Grainger, Inc., balance sheet.


As of December 31 ($ 000s)


2012


2011


2010










Cash and cash equivalents


$ 452,063


$ 335,491


$ 313,454


Accounts receivable (less allowances for doubtful accounts of $19,449, $18,801, $24,552 respectively)


940,020


888,697


762,895


Inventories, net


1,301,935


1,268,647


991,577


Prepaid expenses and other assets


110,414


100,081


87,125


Deferred income taxes


55,967


47,410


44,627


Prepaid income taxes


40,241


54,574


38,393


Total current assets


$ 2,900,640


$ 2,694,900


$ 2,238,071


Grainger reports the following footnote relating to its receivables. Allowance for Doubtful Accounts: The following table shows the activity in the allowance for doubtful accounts.


For Years ended December 31 ($ 000s)


2012


2011


2010


Allowance for doubtful accounts- accounts receivable








Balance at beginning of period


$ 18,801


$ 24,552


$ 25,850


Provision for uncollectable accounts


9,504


4,761


6,718


Write-off of uncollectible accounts, less recoveries


(9,100)


(8,138)


(8,302)


Business acquisitions, foreign currency and other


244


(2,374)


286


Balance at end of period


$ 19,449


$ 18,801


$ 24,552


(a) What amount do customers owe Grainger at each of the year-ends 2010 through 2012?


($ 000s)


2012


2011


2010


Gross accounts receivable


$Answer


$Answer


$Answer


(b) What percentage of its total accounts receivable does Grainger deem uncollectible? Hint: Percentage of uncollectible accounts = Allowance for uncollectible accounts/Gross accounts receivable. Round your answers to two decimal places.




($ 000s)


2012


2011


2010


Percentage of uncollectible accounts to gross accounts receivable


Answer%


Answer%


Answer%




(c) What amount of bad debts expense did Grainger report in its income statement for each of the years 2010 through 2012?


($ 000s)


2012


2011


2010


Bad debts expense (titled Provision for Uncollectible Accounts)


$Answer


$Answer


$Answer




(d) Which of the following statements most closely describes what we observe in our answer to part (b)?


The allowance for uncollectible accounts has decreased as a percentage of gross accounts receivable in 2012. The allowance decreased because the gross accounts receivable has increased and the allowance account has decreased.


The allowance for uncollectible accounts has decreased as a percentage of gross accounts receivable in 2012. This means that Grainger is over-stating its bad debt expense in the current year.


The allowance for uncollectible accounts has increased as a percentage of gross accounts receivable in 2012. The allowance is increasing appropriately because write-offs of uncollectible accounts are also increasing.


The allowance for uncollectible accounts has increased as a percentage of gross accounts receivable in 2012. This means that the allowance was too low in prior years.


(e) If Grainger had kept its 2012 allowance for uncollectible accounts at the same percentage of gross accounts receivable as it was in 2010, by what amount would its profit have changed (ignore taxes)? Answer($ 000s) (f) Which of the following statements about Grainger's allowance for uncollectible accounts and the related bad debts expense is false?


Since 2010, Grainger has decreased its allowance for uncollectible accounts as a percentage of gross receivables.


Grainger's current allowance account appears adequate since it is two times the level of current-year write-offs.


Since 2010 Grainger has decreased it allowance for uncollectible accounts by increasing its write-offs.


Grainger's bad debt expense decreased from 2010 to 2011, but then increased again in 2012.


Question 4


Interpreting and Applying Disclosures on Property and Equipment Following are selected disclosures from the Evett and Sternard Company (a specialty chemical company) 2007 10-K.


Land, Building and Equipment, Net






(in millions)


2007


2006


Land


$ 146


$ 142


Buildings and improvements


2,000


1,900


Machinery and equipment


6,155


5,721


Capitalized interest


352


340


Construction in progress


271


218


Land, Building and Equipment, Gross


8,924


8,321


Less: Accumulated depreciation


5,908


5,481


Total


$ 3,016


$ 2,840


The principal lives (in years) used in determining depreciation rates of various assets are: buildings and improvement (10-50); machinery and equipment (5-20); automobiles, trucks and tank cars (3-10); furniture and fixtures, laboratory equipment and other assets (5-10); capitalized software (5-7). The principal life used in determining the depreciation rate for leasehold improvements is the years remaining in the lease term or the useful life (in years) of the asset, whichever is shorter. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets, other than investments, goodwill and indefinite-lived intangible assets, are depreciated over their estimated useful lives, and are reviewed for impairment whenever changes in circumstances indicate the carrying value of the asset may not be recoverable. Such circumstances would include items such as a significant decrease in the market price of a long-lived asset, a significant adverse change in the manner the asset is being used or planned to be used or in its physical condition or a history of operating or cash flow losses associated with the use of the asset ... When such events or changes occur, we assess the recoverability of the asset by comparing the carrying value of the asset to the expected future cash flows associated with the asset's planned future use and eventual disposition of the asset, if applicable ... We utilize marketplace assumptions to calculate the discounted cash flows used in determining the asset's fair value ... For the year ended December 31, 2007, we recognized approximately $24 million of fixed asset impairment charges. (a) Compute the PPE (land, buildings and equipment) turnover for 2007 (Sales in 2007 are $8,897 million). (Round your answer to two decimal places.) Answer If the median PPE turnover rate for all publicly traded companies is approximately 5.03 in 2007, what does Evett and Sternard's turnover rate tell us about the company?


Evett and Sternard is less capital intensive than the median publicly traded company.


Evett and Sternard is the same capital intensive as the median publicly traded company.


The PPE turnover rate does not tell us anything about how capital intensive Evett and Sternard is.


Evett and Sternard is more capital intensive than the median publicly traded company.


(b) Evett and Sternard reported depreciation expense of $412 million in 2007. Estimate the useful life, on average, for its depreciable PPE assets. (Round your answer to two decimal places.) Answeryears (c) By what percentage are Evett and Sternard's assets "used up" at year-end 2007? (Round your answer to two decimal places.) Answer% Which of the following statements best captures the implication that the assets "used up" computation has for forecasting cash flows?


Evett and Sternard's assets are not particularly "used up" according to this computation. We, therefore, do not expect adverse implication for future cash flow.


A percentage "used up" substantially above 50% indicates that the assets are closer to the end of their useful lives. This means that the depreciation expense will decrease and this in turn will have a positive impact on future cash flows.


The assets "used up" computation can not tell us anything about future cash flows.


A percentage "used up" substantially above 50% indicates that the assets are closer to the end of their useful lives and will require replacement. Such a situation would negatively impact future cash flows.


(d) Evett and Sternard reports an asset impairment charge in 2007. Which of the following statements best captures the implications of asset impairment charges (write-offs)?


Plant assets are deemed to be impaired if their market value is less than their book value, even if temporary. We should treat these write-downs as recurring (operating) items because future write-downs are inevitable.


Plant assets are deemed to be impaired if the undiscounted expected future cash flows from those assets are not sufficient to recover their net book value. We should treat these write-downs as recurring (operating) items because future write-downs are inevitable.


Plant assets are deemed to be impaired if the undiscounted expected future cash flows from those assets are not sufficient to recover their net book value. Because assets impairment charges are arguably nonrecurring, one might use this to justify treating them as transitory items for analysis purposes.


Plant assets are deemed to be impaired if their market value is less than their book value, even if temporary. We should treat these write-downs as transitory.


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