Chapter 10, Problem 1TCL

CALCULATING 3M’s COST OF CAPITAL

In this chapter, we described how to estimate a company’s WACC, which is the weighted average of its costs of debt, preferred stock, and common equity. Most of the data we need to do this can be found from various data sources on the Internet. Here we walk through the steps used to calculate Minnesota Mining & Manufacturing’s (MMM) WACC.

1. As a first step, we need to estimate what percentage of MMM’s capital comes from debt, preferred stock, and common equity. This information can be found on the firm’s latest annual balance sheet. (As of year end 2013, MMM had no preferred stock.) Total debt includes all interest-bearing debt and is the sum of short-term debt and long-term debt.

1. a. Recall that the weights used in the WACC are based on the company’s target capital structure. If we assume that the company wants to maintain the same mix of capital that it currently has on its balance sheet, what weights should you use to estimate the WACC for MMM?
2. b. Find MMM’s market capitalization, which is the market value of its common equity. Using the sum of its short-term debt and long-term debt from the balance sheet (we assume that the market value of its debt equals its book value) and its market capitalization, recalculate the firm’s debt and common equity weights to be used in the WACC equation. These weights are approximations of market-value weights. Be sure not to include accruals in the debt calculation.