Weighted Average Cost of Capital & Financial Statement Ratio Analysis
Company: MMM 3M Co Christina Grace Lehew
You are to estimate your company’s cost of capital. This value is critical in the capital budgeting decisions of your company. Next you’ll compare vital ratios for your firm over time and against a competitor.
1. Cost of Capital (WACC) Estimation:
a. Estimate the company’s cost of equity (Yahoo Finance)
i. Use the Dividend Discount Model as an estimation method1. Forward dividend yield + forecasted growth rate
ii. Use the SML/CAPM as an estimation method1. Use 1% for T-bill and 10% for MRP
iii. Take an average for the overall estimate of cost of equity
b. Estimate the company’s cost of debt using the company’s longest maturity bond on the market.
i. FINRA Market Data Center
c. Estimate the capital structure weights on equity and debt by using the Market Value of Equity and the Book Value of Debt.
d. Estimate the firm’s weighted average cost of capital using the values above.
2. Compare your firm’s financial condition over time and against a competitor (Morningstar website is useful here)
a. Observe the Net margin (net profit margin), Asset Turnover (total asset turnover), and Equity Multiplier (Financial Leverage) over the past 5 years.
i. Make some brief summary statements of how your firm changed over past 5 years.
b. Compare the values in part a. to those of a close competitor company.
i. Make some brief summary statement of how your firm compares to its competitor.