Question

Question text

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

Income Statement
For Fiscal Years Ended ($ millions)	2007	2006	2005
Sales	$ 57,878	$ 51,271	$ 45,682
Credit card revenues	1,612	1,349	1,157
Total revenues	59,490	52,620	46,839
Cost of sales	39,399	34,927	31,445
Selling, general and administrative expenses	12,819	11,185	9,797
Credit card expenses	707	776	737
Depreciation and amortization	1,496	1,409	1,259
Earnings before interest and income taxes	5,069	4,323	3,601
Net interest expense	572	463	570
Earnings before income taxes	4,497	3,860	3,031
Provisions for income taxes	1,710	1,452	1,146
Net earnings	$ 2,787	$ 2,408	$ 1,885

Balance Sheet
($ millions, except footnotes)	February 3, 2007	January 28, 2006
Assets
Cash and cash equivalents	$ 813	$ 1,648
Credit card receivables	6,194	5,666
Inventory	6,254	5,838
Other current assets	1,445	1,253
Total current assets	14,706	14,405
Property and equipment
Land	4,934	4,449
Buildings and improvements	16,110	14,174
Fixtures and equipment	3,553	3,219
Computer hardware and software	2,188	2,214
Construction-in-progress	1,596	1,158
Accumulated depreciation	(6,950)	(6,176)
Property and equipment, net	21,431	19,038
Other noncurrent assets	1,212	1,552
Total assets	$ 37,349	$ 34,995
Liabilities and shareholders' investment
Accounts payable	$ 6,575	$ 6,268
Accrued and other current liabilities	3,180	2,567
Current portion of long-term debt and notes payable	1,362	753
Total current liabilities	11,117	9,588
Long-term debt	8,675	9,119
Deferred income taxes	577	851
Other noncurrent liabilities	1,347	1,232
Shareholders' investment
Common stock	72	73
Additional paid-in-capital	2,387	2,121
Retained earnings	13,417	12,013
Accumulated other comprehensive income (loss)	(243)	(2)
Total shareholders' investment	15,633	14,205
Total liabilities and shareholders' equity	$ 37,349	$ 34,995

a. Compute ROE for 2007.

Do not round until your final answer. Round answer to two decimal places.

ROE =Answer%


b. Confirm that ROE equals ROE computed using the component measures for profit margin, asset turnover, and financial leverage using: ROE = PM * AT * FL.

   Compute the components of ROE.

   Do not round until your final answer. Round answers to two decimal places.

   PM = Answer%
   AT = Answer
   FL = Answer

  
c. Compute adjusted ROA. Assume a tax rate of: 39.0%.

Do not round until your final answer. Round your answer to two decimal places.
Adjusted ROA =Answer%

Answer 1

a)
ROE = Net earnings / Total equity
= $2,787 / $15,633
= 17.83%

ROE = 17.83%

b)
Profit margin = Net income / Sales = $2,787 / $57,878 = 4.8153%

Asset turnover = Net sales / Average total assets = $57,878 / (($37,349 + $34,995) / 2) = 1.6

Financial leverage = ($37,349 + $34,995) / 2) / $15,633 = 2.3138

ROE = Profit margin * asset turnover * financial leverage
= 4.8153% * 1.6 * 2.3138
= 17.83%

ROE = 17.83%

c)
ROA = (Net income / (1 - Tax rate)) / Average total assets
= ($2,787 / (1 - 0.39)) / (($37,349 + $34,995) / 2)
= 12.63%