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Computation of Net Operating profit after taxes

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1. Using the HP income statement on P85,
a. Compute NOPAT for 2004 (4).

NOPAT=Operating Income - Tax
For Year 2004
NOPAT = $4,227-$699 = $3,528 million

2. Referring to HP's balance sheet (p 86),
a. Compute HP's net operating assets (NOA) and net financial obligations (NFO) for 2004. (Hint: the computation is simpler if you utilize NOA = NFO + SE ).

Total Current Assets = 42901
Non Interest Bearing Current Liabilities=28588-2511=26077
Net Current Assets = 42901-26077= 16824
Non-Current Assets = 6649+6657+15828+4103=33237
Total Net Operating Assets = 33237+16824=50061

Check: Debt and other liabilities =2511+4623+5363=12497
Shareholder's equity = 37564

NOA=Shareholder's equity + Debt and Liabilities

b. Using your answer to part 2a, together with your answer to problem 1a, perform a level 1 disaggregation of return on equity (ROE) for 2004 into its operating and non operating components using year-end balances rather than averages. (Hint: the computation is simpler if you utilize NFE = NOPAT - net income).

ROE= Net Income / Shareholders Equity=3497/37564 =9.31%
RNOA=NOPAT/NOA = 3528/50061=7.05%
NFE=NOPAT-Net Income = 3528-3497=31
FLEV=Net Financial Obligations / Equity = 12497/37564=0.33
Net Financial Rate= NFE/Net Financial Obligations=31/12497=0.25%
Spread = RNOA-Net Financial Rate=7.05-0.25=6.80%
Return on non-operating component = Financial Leverage*Spread
=6.80%*0.33=2.26%

Hence ROE(9.31%)=RONA(7.05%) + Return on non-operating component (2.26%)

c. Further disaggregate RNOA into its level 2 margin and turnover components using 2004 year-end balances rather than averages.
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1. Using the HP income statement on P85,
a. Compute NOPAT for 2004 (4).

NOPAT=Operating Income - Tax
For Year 2004
NOPAT = $4,227-$699 = $3,528 million

My comment
NOPAT = Operating Income x (1 - Tax Rate)

NOPAT is a more accurate look at operating efficiency for leveraged companies. It does not include the tax savings many companies get because they have existing debt.
The above calculations are correct.

2. Referring to HP's balance sheet (p 86),
a. Compute HP's net operating assets (NOA) and net financial obligations (NFO) for ...

Solution Summary

This explains the computation of net operating after taxes, return on net operating after taxes.

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Computation of Ratios

Industry Average Actual 2009 Actual 2010
Current Ratio 1.3 1.0
Quick Ratio 0.8 0.75
Average Collection Period 23 Days 30 Days
Inventory Turnover 21.7 19
Debt Ratio 64.7% 50%
Times Interest Earned 4.8 5.5
Gross Profit Margin 13.6% 12.0%
Net Profit Margin 1.0% 0.5%
Return on Total Assets 2.9% 2.0%
Return on Equity 8.2% 4.0%

Income Statement

Sales Revenue $100,000
Less: Cost of Goods Sold 87,000
Gross Profit $13,000
Less: Operating Expenses 11,000
Operating Profit $2,000
Less: Interest Expense 500
Net Profit before Taxes $1,500
Less: Taxes (40%) 600
Net Profit after Taxes $900

Assets
Cash $1,000
Accounts Receivable 8,900
Inventories 4,350
Total Current Assets 14,250
Gross Fixed Assets $35,000
Less: Accumulated Depreciation 13,250
Net Fixed Assets 21,750
Total Assets $36,000

Liabilities and stock holder equity
Accounts Payable $ 9,000
Accrual 6,675
Total Current Liabilities $15,675
Long Term Debt 4,125
Total Liabilities $19,800
Stockholders' Equity:
Common Stock 1,000
Retained Earnings 15,200
Total Stockholders' Equity $16,200
Total Liabilities & Stockholders' Equity $36,000

The current ratio is 2010 is?
Since 2009 the liquidiy has increased or decreased?
The net working capital in 2010 was?
The inventory turnover in 2010 was?
The inventory management since 2009 has?
The average collection period in 2010 was?
The gross profit margin and net profit margin pecets in 2010 were?
The return on total assets in 2010 was?
The return on equity in 2010 was?

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