M4-18.

Net Operating Assets- Operating assets less operating liabilities; it

excludes nonoperation items such as investments in marketable
securities and interest-bearing debt.
Net Operating Assets (NOA)= Net nonoperation obligations (NNO) +
Stockholders Equity (EQ)
NOA= NNO (Nonoperation liabilities nonoperation assets) + 13,857
(EQ found in balance sheet)
Nonoperation assets= (Property 21,477 + Long-term Investments 271
+ Other Assets 1,134)= $22,882
Nonoperation liabilities= (long term debt 9030 + deferred income
taxes 455 + deferred revenue 715 + other liabilities 901) = $11,101
NOA= NNO (11,101-22,882) + EQ (13,857)
NOA= 2,076
M4-19.
Compute Net Operating Profit After Tax (NOPAT) assuming a 37% total
statutory tax rate.
Net Operating profit after tax- operating revenues less operating
expenses such as cost of sales, selling, general and administrative
expense, and taxes; it excludes nonoperation revenues and expenses
such as interest revenue, dividend revenue, interest expense, gains
and losses on investments, discontinued operations.
NOPAT= NOPBT (net operating profit before tax- Tax on operating profit
(37%)
NOPAT= 3,137 x (1-0.35)
NOPAT= $2,039.05
In the book it shows the NOPAT is $1,959 therefore they must have
been using a higher total tax rate.
M4-20.
a. Compute ROE
Return on equity- net income attributable to controlling interest/
Average equity attributable to controlling interest
ROE= {Net Income/Avg Stockholders Equity}= (Net income/Sales)
(Sales/Avg Total Assets)(Avg Total Assets/Avg Total Stockholders
equity)
ROE= 1,335 (Net Income)/ {(6051+5933)/2} (avg total EQ)
ROE= 1,335/ 5992
ROE= 0.222797
b. Disaggregate ROE into profit margin, asset turnover, and financial
leverage
Profit Margin = (Net Income/Sales) = (1335/27,686) = 0.0482
Asset Turnover= (Sales/ Avg Total Assets)= (27,686/ 21,543)= 1.285

Financial Leverage= (Avg Total Assets/Avg EQ)= (21,543/ 5992) =

3.595
ROE= PM x AT x FL
ROE= 0.0482 x 1.285 x 3.595
ROE= 0.222797
M4-21.
a. Compute the 2013 return on net operating assets (RNOA) for both
companies
RNOA(Return on net operating assets) = NOPAT/Average NOA
Abercrombie & Fitch RNOA= 242/ {(1446+1545)/2}
= 242/1495.5
= 0.1618
=16.18%
TJX Companies RNOA= 1925/ {(2393+2395)/2}
= 1925/2394
= 0.8041
=80.41%
b. Disaggregate RNOA into net operating profit margin (NOPM) and net
operating asset turnover (NOAT) for each company. Confirm that
RNOA=NOPM x NOAT
NOPM= (NOPAT/Sales)
NOAT= (Sales/ Average NOA)
Abercrombie & Fitch NOPM= 242/4511
= 0.0536 =5.36%
Abercrombie & Fitch NOAT= 4511/1495.5 = 3.0164
Abercrombie & Fitch RNOA= 0.0536 x 3.0164 = 0.1617 =16.17%
TJX Companies NOPM= 1925/25,878
=0.0744
=7.44%
TJX Companies NOAT= 25,878/ 2394
= 10.8095
TJX Companies RNOA= 0.0744 x 10.8095
= 0.8042 =80.42%
c. Discuss differences observed with respect to NOPM and NOAT and
interpret those differences in light of each companys business model.
Both Abercrombie & Fritch and TJX Companies have similar NOPM
around 5-7% . TJX has a significantly higher NOAT than Abercrombie at
10.8 rather than 3. A higher NOAT is preferable therefore Abercrombie
may want to work increasing this number. This result means that for
each dollar of net operating assets, TJX Company realizes $10.81 in
sales. The RNOA is higher for TJX Companies than Abercrombie & Fitch.
In light of each companies business model it looks like Abercrombie &
Fitch focus on retail with still an above average RNOA for a publicly
traded company which is about 10.5% over the past couple decades.
TJXs had an incredibly high RNOA at 80.42%.
M4-22.
a. Compute the current ratio for each year and discuss any trend in
liquidity. What additional information about the numbers used to
calculate this ratio might be useful in helping us assess liquidity?
Explain.
Current Ratio= Current Assets/ Current Liabilities
2012= 21,235/26,956 = 0.7878
2011= 30,939/30,761 =1.0058

Liquidity is how much cash the company has, how much is expected,
and how much can be raised on a short notice. The current ratio is to
give an idea of the companys ability to pay back its short-term
liabilities with its short-term assets. The higher the current ratio, the
more capable the company is of paying its obligations. In the past year
Verizon has decreased their current ratio by possibly taking out a small
term loan acquiring more debt.
b. Compute times interest earned and the liabilities-to-equity for each
year and discuss any noticeable change. Do you have any concerns
about Verizons financial leverage and the companys ability to meet
interest obligations? Explain.
Times Interest Earned= Earnings before interest and taxes/ interest
expense
This assesses how much operating profit is available to cover debt
obligations.
2012= 12,468/ 2571
= 4.84947
2011= 13,310/ 2827
= 4.70817
These two numbers are very similar between the two years.
Liabilities to Equity = Total Liabilities/ Stockholders Equity
This ratio conveys how reliant a company is on creditor financing
compared with equity financing.
2012= 139,689/ 85,533
= 1.6332
2011= 144,553/ 85,908
= 1.6826
These two numbers are also very similar between the two year.
Overall, I do not have any concerns about Verizons financial leverage
because it is very high. Management wants the times interest earned
ratio to be sufficiently high so that there is little risk of default. Even
though their 4.8 doesnt meet Wal-Marts 13.47, it is still a good
number for the size and type of company they are.
c. Verizons capital expenditures are expected to increase substantially
as it seeks to respond to competitive pressures to upgrade the quality
of its communication infrastructure. Assess Verizons liquidity and
solvency in light of this strategic decision. With buying more
equipment to improve the company the liquidity of the company will
decrease. However they are at a stable position now giving them more
flexibility to make this decision work. With this purchase it will also
increase their assets and value to their company. During this time,
Verizon will be more exposed to being less liquid, however they could
still make it work.