Question

Effect of Investment Accounting on Performance Ratios Since 2005, Yahoo! Inc. has held a significant investment in Alibaba Group. In September, 2014, Alibaba Group closed its initial public offering (IPO) of American Depository Shares (shares). Yahoo! sold 140 million shares in the IPO realizing a pretax gain of $10.3 billion. Following completion of the IPO, Yahoo! retained 383.6 million shares of Alibaba Group representing ap- proximately 15% of the outstanding shares. Note 2 to Yahoo!'s 2014 10-K report details its remain- ing investment in Alibaba. ($ thousands) Cost Basis Fair Value Alibaba Group equity securities..................................... $ 2,713,484 $39,867,789 Yahoo! reported the following (abridged) income statements in its 2014 10-K report (s thousands): Year Ended December 31, 2013 Revenue... ** ***** Operating expenses. Income from operations ....... Other income, net....... Income before income taxes and earnings in equity interests ......... Provision for income taxes........ Earnings in equity interests, net of tax............ Net income... ... 2014 $4,618,133 4,475,191 142,942 10,369,439 10,512,381 (4,038,102) 1,057,863 $7,532,142 $4,680,380 4,090,454 589,926 43,357 633,283 (153,392) 896,675 $1,376,566 The following is from Yahoo!'s balance sheets as presented in its 2014 and 2013 10-K reports ($ thousands): 2012 As of December 31, Total assets... ........... Net operating assets (operating assets - operating liabilities) .......... 2014 $61,960,344 2013 $16,804,959 $11,144,097 $17,103,253 $10,961,873 $11,416,323 REQUIRED a. At the end of 2013, Yahoo! owned 24% of the shares in Alibaba Group and reported its in- vestment as an equity method investment. Describe the impact of the Alibaba Group IPO on Yahoo!'s financial statements. What method does Yahoo! appear to be using to report its investment in Alibaba in 2014? Compute Yahoo!'s retum on assets (ROA) for 2014 and 2013. Compute Yahoo!'s 2014 and 2013 net operating profit after taxes (NOPAT) and its return on net operating assets (RNOA = NOPAT = average net operating assets, refer to Appendix A at the end of Chapter 5 for further discussion). How does this ratio compare to the ROA ratios computed in b?

Answer 1

Answer(B)	Return On Asset(ROA) for 2014 and 2013
ROA	It is return on investment which indicates profitability in comparison to the total assets and determines how efficiently a company is performing
ROA-FORMULA	Divide Net income by total Assets.
	As of December			2014		2013
	Total Assets			$        61,960,344		$     16,804,959
	Net Income			$          7,532,142		$       1,376,566
	ROA%	(Net Income/Total assets)*100		12%		8%