BFIN 367
Follow the numbers. Find the story.
Connecting the financial statements...
"The Advanced Lesson: What will you give up to get ahead?"
Target: 25.0%
NOPAT
NOPBT - Tax on Operating Income
or Net Income + (Net NonOp Exp × (1 - Tax Rate))
RNOA
NOPAT / Average NOA
NOA (Net Operating Assets)
Operating Assets - Operating Liabilities
Identity: Equity = NOA - NNO
NNO (Net Nonop Obligations)
Nonoperating Liabilities - Nonoperating Assets
NNE (Net Nonop Expense)
NOPAT - Total Net Income
or Nonop. Expenses × (1 - Statutory Tax Rate)
FLEV (Financial Leverage)
Average NNO / Average Total Stockholders' Equity
NNEP (Net Nonop Expense %)
NNE / Average NNO
Spread
RNOA - NNEP
Spread measures the profitability of borrowed funds. If RNOA > NNEP, leverage creates value. If negative, leverage destroys value.
Final Aggregation
ROE = RNOA + (FLEV × Spread)
NOPAT
$120,000
NOPBT - Tax on Op IncomeNOA
$1,000,000
Op. Assets - Op. LiabilitiesFLEV
0.00
Average NNO / Average EquityNNEP
5.0%
NNE / Average NNOAccounting Identity: Total Stockholders' Equity = Net Operating Assets (NOA) - Net Nonoperating Obligations (NNO). In the advanced model, we isolate the return from operations (RNOA) and then add the impact of financing leverage.
You balanced operations and financing to reach the ROE target. You are masters of the DuPont Disaggregation.