FSA

Definitions and Notation

Reformulation terminology (Week 2):
NOA = Net Operating Assets
NOA = Operating Assets (OA) Operating Liabilities (OL)

NNO = Net Non-Operating Obligations
NNO = Financial Obligations (FO) Financial Assets (FA)

CSE = Common Shareholders Equity
CSE = Equity Preferred Dividends (treated as Financial Obligation or FO)

New Balance Sheet Equation: NOA = NNO + CSE

NOPAT = Net Operating Profit after Taxes
NOPAT = Operating Revenues (OR) Operating Expenses (OE) Taxes on Operating
Income
NOPAT in the text (exhibit 3.3) does not include Other Comprehensive Income (OCI)
items, however we make that adjustment for OCI items that are Operating. It is
important to note beginning in fiscal 2012, GAAP will require firms to report
Comprehensive Income in the income statement or in a separate statement of
Comprehensive Income right after the income statement. Thus, we are
supplementing the definition of NOPAT to include operating OCI items (as will the
next addition of your text). As discussed below, OCI items will typically be excluded
from the definition of Core NOPAT.

NNE= Net Non-operating Expenses (consists of nonoperating expenses and
revenues, net of tax, also OCI items that are classified as non-operating)
NNE = NOPAT Net Income
Tax on Operating Items = GAAP Taxes + Tax Shield on Net Non-operating Expenses
(NNE)

Tax Shield = Net Interest Expense x Marginal Tax Rate (t)

Traditional Ratios (Week 3):
ROA = (Net Income (NI) + Net Interest (1-t))/ Total Assets (calculated using average
or beginning balances of total Assets)
ROA = Profit Margin (PM) * Asset Turnover (AT)
PM = (Net Income (NI) + Net Interest (1-t))/ Sales
AT = Sales / Total Assets

ROE = Net Income / Equity (calculated using average or beginning balances of
Equity)
ROE = NI/Sales * Sales/Total Assets * Total Assets/Equity
Leverage = Total Assets/Equity (calculated using average or beginning balances of
Assets and Equity)

Reformulated Ratios (Week 3):

RNOA = NOPAT / NOA (calculated using average or beginning balances of NOA)
RNOA = NOPM * NOAT
NOPM = NOPAT/Sales
Operating Profit for each dollar of Sales
NOAT = Sales/NOA

The ability to generate Sales for a given Net Operating Asset base

ROCE = CI adjusted for preferred Dividends / CSE (calculated on with or beginning
balances of CSE)
ROCE = RNOA + FLEV * SPREAD
FLEV = NNO/CSE
Financial Leverage, analogous to Leverage in traditional ratios
SPREAD = RNOA NNEP
Where NNEP = Interest rate paid to debt-holders
NNEP (Net Nonoperating Expense Percentage) = NNE/Average NNO

Alternatively,
ROCE = NOPM * NOAT + FLEV * SPREAD
If we are able to leverage successfully, i.e. SPREAD is a positive number then
ROCE > RNOA. This means that RNOA > NNEP. You also want to think about
the effects of negative financial leverage because that could hurt you.

Altering the above definitions for the concept of Core (Week 4):
Core NOPAT = NOPAT Transitory or unusual items and most other comprehensive
income

Common Transitory Items
Restructuring Charges, Asset Impairments and Special Charges
Gains and Losses on discontinued operations
Realized Gains and Losses
Unrealized Gains and Losses on Equity Investments (OCI)
Unrealized Gains and Losses from Fair Value Accounting
Gains and losses from Foreign Currency Translations (OCI)
Temporary Tax benefits from Income Tax
Other Income (footnote disclosure)
Changes in Estimates

Core NOA= NOA Operating assets associated with the transitory items above +
Operating liabilities associated with the transitory items above
Core NOPM = Core NOPAT/Core Revenues
Core NOAT = Core Revenues/Core NOA
Core RNOA = Core NOPM * Core NOAT
in Core RNOA1 = Margin Effect + Turnover Effect
Margin Effect = [ Core NOPM1 * Core NOAT0]
Turnover Effect = [ Core NOAT1 * Core NOPM1]