# Ine ifrs income statements and their notes to make an

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ine IFRS income statements and their notes to make an independent assessment of what is operating. IFRS income statements usually report separately the other nonoperating revenues and expenses even though this is not required. We can better assess the nature of these items by reading the notes. Refer to the income statement and balance sheet ofWalmart, from Mid-Module Reviews 1 and 2 earlier in this module. Required 1. Compute Walmart's nonoperating return for 20ll. 2. Compute Target's nonoperating return for 20ll from the information reported in this module. Compare and contrast the nonoperating return for Walmart and Target. Interpret the results. 3. Compute Walmart's liabilities-to-equity ratio for 20ll. 4. Compute Target's liabilities-to-equity ratio for 2011 from the balance sheet in this module. Compare and contrast the ratio to Walmart's liabilities-to-equity ratio. Interpret the results. The solution is on page 3-50. APPENDIX 3A: Nonoperating Return Component of ROE In this appendix, we consider the nonoperating return component of ROE in more detail. We also provide a deriva- tion of that nonoperating return and discuss several special topics pertaining to it. We begin by considering three special cases of capital structure financing. Nonoperating Return Framework In the module, we infer the nonoperating return as the difference between ROE and RNOA. The nonoperating re- turn can also be computed directly as FLEV X Spread, where FLEV is the degree of financial leverage and Spread is the difference between the assets' after-tax operating return (RNOA) and the after-tax cost of debt. ROE", Net Income/Average Equity '" RNOA + [FLEVxSpread] J I ~ , + FLEV '" Average NNO/Average Equity ~ RNOA '" NOPAT/Average NOA Spread '" RNOA- NNEP Exhibit 3A.l provides definitions for each of the terms required in this computation. -- ---- _. - EXHIBIT 3A.1 Nonoperating Return Definitions NNO: Net nonoperating obligations . Nonoperating liabilities (plus any noncontrolling interest reported on the balance sheet) less nonoperating assets Average NNO/Average equity NOPAT - Net income'; NNE consists of nonoperating expenses and revenues, net of tax, as well as any non controlling interest reported on the income statement. (Noncontrolling interest is excluded from the tax shield estimation.) NNEIAverage NNO RNOA- NNEP FLEV: Financial leverage ............. ....... NNE: Net nonoperating expense ; . NNEP: Net nonoperating expense percent . Spread . • Amount attributable to the parent company's shareholders.

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Module 3 I Profitability Analysis and Interpretation 3-22 operating Return-With Debt Financing, but ~·'llirf.hout Nonoperating Assets te computation of the nonoperating return when the company has debt and equity financing (without ::C::o;JeGll!i'mgassets), let's refer to our example in this module of the company that increases its ROE through use or this first illustration, view FLEV as the relative use of debt in the capital structure, and Spread as the .:::::ii=::loce between RNOA and the net nonoperating expense percent.) Again, assume that this company has \$1,000 - _'. 500 of 7% debt, total assets of \$1,500 that earn a 20% return, and a tax rate of 0%. The net income of
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