Refer to the financial information of Costco Wholesale Corporation (COST) in P4-39 to answer the following requirements.

Required

a. Compute Costco's financial leverage (FLEV), Spread and noncontrolling interest (NCI) ratio for 2013: recall. NNF \(=\) NOPAT - Net income.

b. Assume that Costco's return on equity (ROE) for 2013 is \(17.58 \%\) and its return on net operating assets (RNOA) is \(21.78 \%\). Confirm computations to yield the relation: \(\mathrm{ROE}=[\mathrm{RNOA}+\) (FLEV \(\times\) Spread)] \(\times\) NCI ratio.
\(c\). What do your computations of the nonoperating return in parts \(a\) and \(b\) imply about the company's use of borrowed funds?

Q4-39

Balance sheets and income statements for Costco Wholesale Corporation follow.

Required

a. Compute net operating profit after tax (NOPAT) for 2013. Assume that the combined federal and state statutory tax rate is \(37 \%\).

b. Compute net operating assets (NOA) for 2013 and 2012.

c. Compute and disaggregate Costco's RNOA into net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2013; confirm that RNOA \(=\) NOPM \(\times\) NOAT. Comment on NOPM and NOAT estimates for Costco in comparison to those for Walmart calculated earlier in this module.

d. Compute net nonoperating obligations (NNO) for 2013 and 2012. Confirm the relation: \(\mathrm{NOA}=\) NNO + Stockholders' equity.

e. Compute return on equity (ROE) for 2013.

f. Infer the nonoperating return component of ROE for 2013.
g. Comment on the difference between ROE and RNOA. What does this relation suggest about Costco's use of equity capital?

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For Fiscal Years Ended ($ millions) Revenue Net sales.. Membership fees Total revenue... Operating expenses Merchandise costs Selling, general and administrative. Preopening expenses.. Operating income. Other income (expense) Consolidated Statements of Earnings Interest expense.... Interest income and other, net Income before income taxes. Provision for income taxes. Net income including noncontrolling interests. Net income attributable to noncontrolling interests. Net income attributable to Costco.... September September 1, 2013 2, 2012 $102,870 2,286 105,156 91,948 10,104 51 3,053 (99) 97 3,051 990 2,061 (22) $ 2,039 $97,062 2,075 99,137 86,823 9,518 37 2,759 (95) 103 2,767 1,000 1,767 (58) $ 1,709 August 28, 2011 $87,048 1,867 88,915 77,739 8,691 46 2,439 (116) 60 2,383 841 1,542 (80) $1,462