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Analysis and Interpretation of ROE and RNOA with No Noncontrolling Interest

Balance sheets and income statements for Nordstrom, Inc. follow. Refer to these financial statements to answer the requirements.

NORDSTROM, INC. Consolidated Statements of Earnings
For Fiscal Years Ended ($ millions)	2011	2010	2009
Sales	$ 9,310	$ 8,258	$ 8,272
Credit card revenues	390	369	301
Total revenues	9,700	8,627	8,573
Cost of sales and related buying and occupancy costs	(5,897)	(5,328)	(5,417)
Selling, general and administrative expenses
Retail	(2,412)	(2,109)	(2,103)
Credit	(273)	(356)	(274)
Earnings before interest and income taxes	1,118	834	779
Net interest expense	(127)	(138)	(131)
Earnings before income taxes	991	696	648
Income tax expense	(378)	(255)	(247)
Net earnings	$ 613	$ 441	$ 401

NORDSTROM, INC. Consolidated Balance Sheets
($ millions)	January 29, 2011	January 30, 2010
Assets
Current Assets
Cash and cash equivalents	$ 1,506	$ 795
Accounts receivable, net	2,026	2,035
Merchandise inventories	977	898
Current deferred tax assets, net	236	238
Prepaid expenses and other	79	88
Total current assets	4,824	4,054
Land, buildings and equipment, net	2,318	2,242
Goodwill	53	53
Other assets	267	230
Total assets	$ 7,462	$ 6,579
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable	$ 846	$ 726
Accrued salaries, wages and related benefits	375	336
Other current liabilities	652	596
Current portion of long-term debt	6	356
Total current liabilities	1,879	2,014
Long-term debt, net	2,775	2,257
Deferred property incentives, net	495	469
Other liabilities	292	267
Shareholders' equity
Common stock, no par value	1,168	1,066
Retained earnings	882	525
Accumulated other comprehensive income (loss)	(29)	(19)
Total shareholders' equity	2,021	1,572
Total liabilities and shareholders' equity	$ 7,462	$ 6,579

HINT: For Sales use "Total revenues" for your computations, when applicable.

(a) Compute net operating profit after tax (NOPAT) for 2011. Assume that the combined federal and statutory rate is: 37.0%. (Round your answer to the nearest whole number.) 2011 NOPAT = $Answer

(b) Compute net operating assets (NOA) for 2011 and 2010. 2011 NOA = $Answer

2010 NOA = $Answer

(c) Compute RNOA, net operating profit margin (NOPM), and net operating asset turnover (NOAT) for 2011. Do not use NOPM x NOAT to calculate RNOA. (Do not round until your final answer. Round answers to two decimal places.) 2011 RNOA = Answer

% 2011 NOPM = Answer

% 2011 NOAT = Answer

(d) Compute net nonoperating obligations (NNO) for 2011 and 2010. 2011 NNO = $Answer

2010 NNO = $Answer

(e) Compute return on equity (ROE) for 2011. (Round your answers to two decimal places. Do not round until your final answer.) 2011 ROE = Answer

%

(f) Infer the nonoperating return component of ROE for 2011. (Use answers from above to calculate. Round your answer to two decimal places.) 2011 nonoperating return = Answer

%

(g) Comment on the difference between ROE and RNOA. Which of the following statements best describes the inference from the difference between Nordstrom's ROE and RNOA?

ROE>RNOA implies that Nordstrom's equity has grown faster than its NOA. The faster increase of equity compared to NOA allows higher dividends to be paid to Nordstrom's stockholders.

ROE>RNOA implies that Nordstrom 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 Nordstrom's stockholders.

ROE>RNOA implies that Nordstrom has taken on too much financial leverage. The high financial leverage results in a higher interest rate on Nordstrom's debt, therefore the cost of debt is greater.

ROE>RNOA implies that Nordstrom has increased its financial leverage during the period. The increase in financial leverage also increases Nordstrom's risk, therefore increasing the expected ROE by Nordstrom's stockholders.

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