Question

Direct Computation of Nonoperating Return with Noncontrolling Interest

Balance sheets and income statements for Costco Wholesale Corporation follow.

Costco Wholesale Corporation
Consolidated Statements of Earnings
For Fiscal Years Ended ($ millions)	September 2, 2018
Total revenue	$141,576
Operating expenses
Merchandise costs	123,152
Selling, general and administrative	13,876
Preopening expenses	68
Operating Income	4,480
Other income (expense)
Interest expense	159
Interest income and other, net	(121)
Income before income taxes	4,442
Provision for income taxes	1,263
Net income including noncontrolling interests	3,179
Net income attributable to noncontrolling interests	(45)
Net income attributable to Costco	$3,134

Costco Wholesale Corporation
Consolidated Balance Sheets
($ millions, except par value and share data)	September 2, 2018	September 3, 2017
Current assets
Cash and cash equivalents	$6,055	$4,546
Short-term investments	1,204	1,233
Receivables, net	1,669	1,432
Merchandise inventories	11,040	9,834
Other current assets	321	272
Total current assets	20,289	17,317
Net property and equipment	19,681	18,161
Other assets	860	869
Total assets	$40,830	$36,347
Current liabilities
Accounts payable	$11,237	$9,608
Accrued salaries and benefits	2,994	2,703
Accrued member rewards	1,057	961
Deferred membership fees	1,624	1,498
Other current liabilities	3,014	2,725
Total current liabilities	19,926	17,495
Long-term debt	6,487	6,573
Other liabilities	1,314	1,200
Total liabilities	27,727	25,268
Equity
Preferred stock, $0.01 par value:	0	0
Common stock, $0.01 par value:	4	4
Additional paid-in-capital	6,107	5,800
Accumulated other comprehensive loss	(1,199)	(1,014)
Retained earnings	7,887	5,988
Total Costco stockholders’ equity	12,799	10,778
Noncontrolling interests	304	301
Total equity	13,103	11,079
Total liabilities and equity	$40,830	$36,347

In 2018, Costco’s return on equity (ROE) is 26.59% and its return on net operating assets (RNOA) is 26.52%. Assume that the combined federal and state statutory tax rate is 22%.

a. Compute net nonoperating expense (NNE) and net operating profit after tax (NOPAT). Round to the nearest whole number, if applicable.
2018 NNE $159 million
2018 NOPAT $3494.4 million

b. Compute net nonoperating obligations (NNO) for 2018 and 2017.
2018 NNO $
2017 NNO $

c. Compute financial leverage (FLEV). Round answer to four decimal places.
2018 FLEV

d. Compute NNEP and Spread. Round answers to two decimal places (example: 0.12345 = 12.35%).
2018 NNEP
2018 Spread Answer%

e. Compute the noncontrolling interest ratio (NCI ratio).  Round answer to four decimal places.
2018 NCI Ratio

f. Confirm the relation: ROE = [RNOA + (FLEV × Spread)] × NCI ratio.
2018 ROE =

Answer 1