This modified return on equity formula is more

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This modified return on equity formula is more accurately labeled return on common equity (ROCE). Net income - Preferred dividends ROCE=-------------------- Average stockholders' equity - Average preferred equity Noncontrolling Interest When a company acquires controll ing interest of the outstanding voting stock of another company, the parent company must consolidate the new subsidiary in its balance sheet and income statement (see
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L04 Describe and illustrate tra- ditional DuPont disaggrega- tion of ROE. Module 3 I Profitability Analysis and Interpretation 3-26 ~ 9). This means that the parent company must include 100% of the subsidiary's assets, liabilities, revenues and ~~...c.lf the parent acquires less than 100% of the subsidiary's voting stock, the remaining claim of noncontrolling ders is reported on the balance sheet as a component of stockholders' equity called noncontrolling interest, income is separated into income attributable to company shareholders and that attributable to noncontrolling .The ROE computation, then, should use the net income attributable to company shareholders divided by the ~~stockholders' equity where equity excludes noncontrolling interest. -0 illustrate the calculation of ROE, FLEV, and Spread in the presence of noncontrolling interest we consider - wing selected balance sheet and income statement items from Walmart ($ millions). 2011 Balance sheet items et operating assets (NOA) . $114,040 onoperating liabilities . Less: Nonoperating assets . Plus: Noncontrolling interest . NO including noncontrolling interest . Equity (attributable to Walmart shareholders) . Total NNO and Equity . $ 50,319 (7,526) 2,705 45,498 68,542 $114,040 Income statement items et operating profit after tax (NOPAT) . et nonoperating expense (NNE) . et income attributable to Walmart shareholders . $ 17,222 (833) $ 16,389 2010 Average $106,320 $110,180 $ 41,719 $ 46,019 (8,047) (7,787) 2,180 2,443 35,852 40,675 70,468 69,505 $106,320 $110,180 ~ n compute the following key ratios ($ millions): :J' OA . E .............. .......................... .......... ....... =LEV ......................................... •..•..• .... •..• .... EP . ead . 15.63% 23.58% 0.585 2.05% 13.58% ($17,222/$110,180) ($16,389/$69,505) ($40,675/$69,505) ($833/$40,675) (15.63% - 2.05%) can also calculate NNE directly as follows ($ millions): ~ nonoperating expenses (excluding noncontrolling interest), pretax . less: Tax shield on net nonoperating expenses (excluding noncontrolling interest), net at 37% . et nonoperating expenses (excluding noncontrolling interest), after-tax . less: Income from discontinued operations, after-tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .., us: Net income attributable to noncontrolling interest . et nonoperating expense . $2,004 (741) 1,263 (1,034) 604 $ 833 P PEN D IX 3 B: DuPont Disaggregation Analysis - ggregation of return on equity (ROE) into three components (profitability, turnover, and financial leverage) - initially introduced by the E.I. DuPont de Nemours and Company to aid its managers in performance _ zluation. DuPont realized that management's focus on profit alone was insufficient because profit can be simply ased by additional investment in low-yielding, but safe, assets. Further, DuPont wanted managers to think ~ investors and to manage their portfolio of activities using investment principles that allocate scarce investment ital to competing projects in descending order of return on investment (the capital budgeting approach). The =:lDPont model incorporates this investment perspective into performance measurement by disaggregating ROE the following three components: 1. Profitability Turnover
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