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Computation of Net Operating profit after taxes

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.

$2.19