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P3-49 Direct Computation of Non-operating Return

Refer to the financial information of 3M Company in P3-46 to answer the following requirements.

Required:

a. Compute its financial leverage (FLEV), Spread, and non-controlling interest (NCI) ratio for 2015. Recall that NNE = NOPAT-NEt Income

b. Assume that its return on equity (ROE) for 2015 is 38.95% and its return on net operating assets (RNOA) is 26.58%. Confirm computations to yield the relation: Roe = (RNOA + (FLEV x Spread )) x NCI ratio.

c. What do your computations of the non-operating return imply about the company's use of borrowed funds?

At December 31 ($ millions, except per share amount) Liabilities Current liabilities 2015 2014 Short-term borrowings and current portion of long-term debt.. . . . . . . . . . . .$ 2,044 1,694 644 332 2,404 $ 106 1,807 732 435 2,884 Accrued income t 7,118 8,753 3,520 5,964 6,705 3,843 1,555 $18,067 Equity 3M Company shareholders' equity: Common stock, par value $0.01 per share Shares outstanding-2015: 609,330,124; 4,379 34,317 (19,307) (6,289) 13,109 Accumulated other comprehensive income (loss). . . . . . . . . . . . . . . .. . . . . . . . (6,359) 39 $13,142 $31,209 Total liabilities and equity $32,718 . . .. .. .. .. . . . . . .. . . . . .. . . .. 3M COMPANY Consolidated Statements of Income For Years Ended Dec. 31 (S millions) 2015 2014 2013 $31,821 $30,871 Operating expenses 16,447 6,469 1,770 24,686 7,135 16,106 6,384 1,715 24,205 6,666 Selling, general and administrative expenses . .. . . . . . . 6,182 Interest expense and income 149 (26) 123 6,823 1,982 4,841 142 (33) 109 7,026 2,028 4,998 42 $ 4,956 145 (41) 104 6,562 1,841 4,721 62 $4,659 Income before income taxes . . _ . . .. . _ _ . . . . . _ . . . . Net income including noncontrolling interest. . . . . . . . . Less: Net income attributable to noncontrolling interest.. . 3M COMPANY Consolidated Balance Sheets At December 31 ($ millions, except per share amount) 2015 2014 Current assets $1,897 1,439 4,238 118 Inventories: Finished goods. 1,655 1,008 855 1,723 1,081 902 . 3,518 1,398 3,706 1,023 12,303 15 102 22,841 (14,352) 8,489 7,050 1,435 46 1,769 9 8,515 Intangiblea Prepaid pension benefits 188 1,053 $31,209 At December 31 ($ millions, except per share amount) Liabilities Current liabilities 2015 2014 Short-term borrowings and current portion of long-term debt.. . . . . . . . . . . .$ 2,044 1,694 644 332 2,404 $ 106 1,807 732 435 2,884 Accrued income t 7,118 8,753 3,520 5,964 6,705 3,843 1,555 $18,067 Equity 3M Company shareholders' equity: Common stock, par value $0.01 per share Shares outstanding-2015: 609,330,124; 4,379 34,317 (19,307) (6,289) 13,109 Accumulated other comprehensive income (loss). . . . . . . . . . . . . . . .. . . . . . . . (6,359) 39 $13,142 $31,209 Total liabilities and equity $32,718 . . .. .. .. .. . . . . . .. . . . . .. . . .. 3M COMPANY Consolidated Statements of Income For Years Ended Dec. 31 (S millions) 2015 2014 2013 $31,821 $30,871 Operating expenses 16,447 6,469 1,770 24,686 7,135 16,106 6,384 1,715 24,205 6,666 Selling, general and administrative expenses . .. . . . . . . 6,182 Interest expense and income 149 (26) 123 6,823 1,982 4,841 142 (33) 109 7,026 2,028 4,998 42 $ 4,956 145 (41) 104 6,562 1,841 4,721 62 $4,659 Income before income taxes . . _ . . .. . _ _ . . . . . _ . . . . Net income including noncontrolling interest. . . . . . . . . Less: Net income attributable to noncontrolling interest.. . 3M COMPANY Consolidated Balance Sheets At December 31 ($ millions, except per share amount) 2015 2014 Current assets $1,897 1,439 4,238 118 Inventories: Finished goods. 1,655 1,008 855 1,723 1,081 902 . 3,518 1,398 3,706 1,023 12,303 15 102 22,841 (14,352) 8,489 7,050 1,435 46 1,769 9 8,515 Intangiblea Prepaid pension benefits 188 1,053 $31,209

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