Study Guide For Brigham/houston's Fundamentals Of Financial Management, 14th
Study Guide For Brigham/houston's Fundamentals Of Financial Management, 14th
14th Edition
ISBN: 9781305403895
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
bartleby

Concept explainers

bartleby

Videos

Textbook Question
Book Icon
Chapter 10, Problem 3TCL

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.

3. Next, we need to calculate MMM’s cost of debt. We can use different approaches to estimate it. One approach is to take the company’s interest expense and divide it by total debt (which is the sum of short-term debt and long-term debt). This approach only works if the historical cost of debt equals the yield to maturity in today’s market (i.e., if MMM’s outstanding bonds are trading at close to par). This approach may produce misleading estimates in years in which MMM issues a significant amount of new debt. For example, if a company issues a great deal of debt at the end of the year, the full amount of debt will appear on the year-end balance sheet, yet we still may not see a sharp increase in annual interest expense because the debt was outstanding for only a small portion of the entire year. When this situation occurs, the estimated cost of debt will likely understate the true cost of debt. Another approach is to try to find this number in the notes to the company’s annual report by accessing the company’s home page and its Investor Relations section. Alternatively, you can go to other external sources, such as bondsonline.com, for corporate bond spreads, which can be used to find estimates of the cost of debt. Remember that you need the after-tax cost of debt to calculate a firm’s WACC, so you will need MMM’s tax rate (which has averaged around 30% in recent years). What is your estimate of MMM’s after-tax cost of debt?

Blurred answer
Students have asked these similar questions
Q1: Blossom is 30 years old. She plans on retiring in 25 years, at the age of 55. She believes she will live until she is 105.   In order to live comfortably, she needs a substantial retirement income. She wants to receive a weekly income of $5,000 during retirement. The payments will be made at the beginning of each week during her retirement.    Also, Blossom has pledged to make an annual donation to her favorite charity during her retirement. The payments will be made at the end of each year. There will be a total of 50 annual payments to the charity. The first annual payment will be for $20,000. Blossom wants the annual payments to increase by 3% per year. The payments will end when she dies.   In addition, she would like to establish a scholarship at Toronto Metropolitan University. The first payment would be $80,000 and would be made 3 years after she retires. Thereafter, the scholarship payments will be made every year. She wants the payments to continue after her death,…
Could you please help explain what is the research assumptions, research limitations, research delimitations and their intent? How the research assumptions, research limitations can shape the study design and scope? How the research delimitations could help focus the study and ensure its feasibility? What are the relationship between biblical principles and research concepts such as reliability and validity?
What is the concept of the working poor ? Introduction form. Explain.

Chapter 10 Solutions

Study Guide For Brigham/houston's Fundamentals Of Financial Management, 14th

Knowledge Booster
Background pattern image
Finance
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781285867977
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Text book image
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College
What is WACC-Weighted average cost of capital; Author: Learn to invest;https://www.youtube.com/watch?v=0inqw9cCJnM;License: Standard YouTube License, CC-BY