Running head: WEIGHTED AVERAGE COST OF CAPITAL FOR 3M

CORPORATION

Weighted Average Cost of Capital for 3M Corporation

Christopher Columbus
FIN 515
August 16, 1691
Amerigo Vespucci

WEIGHTED AVERAGE COST OF CAPITAL FOR 3M CORPORATION

Weighted Average Cost of Capital for 3M Corporation

The Weighted Average Cost of Capital (WACC) measures ---- the cost of existing capital
raised through debt financing and equity financing efforts. This measurement is based on the
amount of financing achieved through debt ---- and through equity, the costs associated with
those forms of financing, and the effective tax rate of the corporation. By analyzing the WACC
of The 3M Company, the author gained a high ---- er level of confidence regarding the accuracy
of the calculations because the company is established and conforms to the reporting
requirements of public companies. These traits enhance the ---- relationship between the
company a ---- nd investors as evidenced by the high stock price and high P/E ratio despite
relatively low dividends.
The WACC is calculated by average the ---- cost of financing achieved through equity
and financing achieved through debt adjusted for tax impact. The formula is

in which E represents the amount of financing ---- achieved through equity, D represents the
amount of financing achieved through debt, rE represents the cost of equity, rD represents the
cost of debt, and tC repr ---- esents the effective tax rate.
The formula applies the cost of equity to the portion of finan ---- cing achieved through
equity and adds this value ---- to the cost of debt applied to the portion of financing achieved
through debt after adjusting for tax impact. This allows managers to arrive at t ---- he cost of
financing the operations of the business, helping to guide th ---- e decision making process of
determining the required ra ---- te of return. This also allows investors to consider how viable a
businesss plans may be based on the cost of financing and the conditions of the competitive
landscape.

WEIGHTED AVERAGE COST OF CAPITAL FOR 3M CORPORATION

In 3Ms case, the foll ---- owing values were used:

E (From 3M ---- Company 2014 SEC 10-K filings, page 50 Total Equity): $13,142,000,000
D (From 3M Company 2014 SEC 10-K ---- filings, page 50 Long Term Debt):
$6,731,000,000
Total Amount Financed: $19,873,000,000
Risk Free Rate (based on ---- 10 Year U.S. Treasury Bond) 2.05%
Market Rate (ba ---- sed on Risk Free Rate + 4% given Market Risk Premium): 6.05%
Market Risk Premium (Given): 4%
Beta Coefficient (From Yah ---- oo Finance): 1.23
Debt Inter ---- est Rate (From bondsonline.com based on AA- rating from Standard and Poor):
3.2%
Tax Rate (From 3M Company 2014 SEC 10-K filings, pag ---- e 23 Effective Tax Rate):
28.90%
Before calculating the Weighted Average Cost of Capital, the Cost of Debt and Cost of
Equity must be calculated. Th ---- e Cost of Equity is calculated by adding the Risk Free Rate to
Market Risk Premium times the Beta coefficient, estimating the risk above the risk free rate for
the market and adjusting it to the companys beta, which is how closely aligned to market
fluctuations th ---- eir stock price is. For 3M, the Cost of Equity wa ---- calculated as 6.97%.
The Cost of Debt is calculated by multiplying the debt interest rate with the tax impact, or 1
minus the effective tax rate. For 3M, the Cost of Debt was calculated as 2.28%.
The weighted average cost of capital for 3M is then calculated by multiplying the percent
of financing achieved through equ ---- ity with the Cost of Equity, then adding that product to the
percent of financing achieved through debt with the Cost of Debt. The resultin ---- g value for

WEIGHTED AVERAGE COST OF CAPITAL FOR 3M CORPORATION

3M is 5.38%, as illu ---- strated in the table below and the attachment, appendix A.

WEIGHTED AVERAGE COST OF CAPITAL FOR 3M CORPORATION

The WAC ---- C, then, is a value that lies between the Cost of Equity and the Cost of
Debt, leaning to one side based on how much of the company ---- s financing was achieved by
one method or the other. By using publicly available information, such as the Standard and Poor
credit rating of the ---- company and the associated rate of return of a corporate bond with that
rate, the authors confidence in the accuracy of the calculations is slvightly less than if access to
internal company i ---- nformation was available. Further, the use of a given estimate for the
market risk premium also erodes confidence. Both primary measu ---- res of cost of capital are
compromised by the use of non-specific information, reducing the likelihood that the result of
the calculatio ---- ns is fully accurate.

WEIGHTED AVERAGE COST OF CAPITAL FOR 3M CORPORATION

References
Bondsonline: Composite Bond Rates. (2015, August 21). Retrieved August 23, 2015, from
http://www.bond ---- sonline.com/Todays_Market/Composite_Bon ---d_Yields_table.php
The 3M Company. (2015). Annual report 2014. Retrieved from http://d1lge ---852tjjqow.cloudfront.net/CIK-0000066740/ad82c9d0-87c2-416b-82c49d9967bf4ed0.pdf?noexit=true
3M Co. (2015). Retrieved August 23, 2015, from http://www.standardandpoo ---rs.com/en_US/web/guest/ratings/entity/-/org-details/sectorCode/CORP/entityId/101525
3M Company. (2015, August 21). Retrieved August 23, 2015, from http://finance.yahoo.c ---om/q?s=MMM