3m Case Study

Case Study – 3M

Executive Summary

In this report, I will estimate 3M’s cost of debt and equity as well as calculate its weighted average cost of capital for the purpose of analyzing and forecasting its financial statements. I will also compute the company’s intrinsic value, suggest improvements and analyze a proposed project of expansion. Finally, I will present my conclusion of the company’s financials, as well as argue for the implementation of the proposed project by showing its impact on 3M’s value.

1. Introduction

The company I chose was 3M. 3M is a technology company which segments are: Industrial and Transportation, providing tapes, and filtration products among others; Health Care, providing medical and surgical supplies, and skin health and infection prevention products among others; Consumer and Office, providing office supply, and stationery products among others; Safety, Security and Protection Services, providing personal protection, and electronic surveillance products among others; Display and Graphics, providing optical film applications for LCD electronic displays, and mobile interactive applications among others; and Electro and Communications, providing telecommunications and electrical products among others. 

Since it is a fairly stable company with predictable cash flows, I expect the cost of capital to buy to be low relative to 10%.

2. Cost of capital estimation

2.1 Cost of debt estimation

Company’s Credit Rating AA- (Standard & Poor’s)

Market rate for a 10 year non-callable bond AA- rated 5%

The rate is competitive and company is not pending for a downgrade.

3M has publicly traded bonds, yes.

The company’s tax rate = 21% (5 years)

3.2 Cost of equity estimation

The company does not have any preferred stock

Cost of common stock = rs = Rrf + (RPm)bi

Where Rrf = 1.69% (yahoo finance 10 year T bond)

Market Risk Premium (10 year arithmetic average of S&P 500 minus the Rf)...