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. Finally, you can also go to Morningstar.com, which will provide yield to maturity information on the firm's various bond issues. A longer-term issue's YTM could provide an estimate of the firm's current cost of debt to be used in the WACC calculation. 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? MMM Annual Effective Tax Rate (Dec 31 2018) (Dec 31 2017) (Dec 31 2016) (Dec 31 2015) (Dec 31 2014) Y/Y Annual Pre-Tax Income Growth -7.26% 7.02 % 3.37 % -2.89 % 7.07 % Y/Y Annual Income taxes expenses/-benefit Growth -38.9% 34.29 % 0.66% -2.27 % 10.16 % Annual Effective Tax Rate 23.39 % 35.49% 28.29% 29.05% 28.86 % Dec. 31, 2014 Dec. 31, 2013 $ 1,897 $2,581 626 756 4,238 4,253 Consolidated Balance Sheet (USD S) In Millions, unless otherwise specified Current assets Cash and cash equivalents Marketable securities - current Accounts receivable - net of allowances of $94 and $104 Inventories Finished goods Work in process Raw materials and supplies Total inventories Other current assets Total current assets Marketable securities - non-current Investments Property, plant and equipment Less: Accumulated depreciation Property, plant and equipment - net Goodwill Intangible assets - net Prepaid pension benefits Other assets Total assets 1.723 1,790 1,081 1,139 902 935 3,706 3,864 1,298 1,279 11,765 12,733 828 1,453 102 122 22,841 23.068 (14,352) (14,416) 8,489 8,652 7,050 7,345 1,435 1,688 577 1,554 980 31,26933,550 46 Current liabilities Short-lemborowings and current portion of long-term debt Accounts ruvable Accrued payroll Accrued income taxes Other current liabilities Total current liabilities Long-term debt Pension and postretirement benefits Other liabilities Total liabilities Commitments and contingencies (Note 13) 3M Company shareholders' equity: Common stock par value. S.Ol per share, Shares outstanding - 2014:0 635.134 594: Shares outstanding - 2013: 663,296,239 Additional paid in capital Retained earnings 106 1.807 732 435 2,918 5.998 6,731 3.843 1,555 18,127 1.683 1.799 708 417 2,891 7.498 4.326 1.794 1.984 15,602 9 4,379 34,317 4,375 32,416 (19,307) (6,289) 13,109 Treasury stock Accumulated other comprehensive income (loss) Total 3M Company shareholders' equity Noncontrolling interest Total equity Total liabilities and equity (15,385) (3,913) 17,502 446 17,948 $ 33,550 13,142 $31,269 Income Statement All numbers in thousands Get access to 15+ years of historical data with Yahoo Finance Premium. Learn more Breakdown TTM 12/31/2018 12/31/2017 12/31/2016 12/31/2015 Total Revenue 32,131,000 32,765,000 31,657,000 30,109,000 30,274,000 Cost of Revenue 16,842,000 16,682,000 16,001,000 15,040,000 15,383,000 Gross Profit 15,289,000 16,083,000 15,656,000 15,069,000 14,891,000 Operating Expenses Research Development 1,814,000 1,821,000 1,850,000 1,735,000 1,763,000 Selling General and Administrative 6,863,000 7,602,000 6,572,000 6,111,000 6,182,000 Total Operating Expenses 8,677,000 9,423,000 8,422,000 7,846,000 7.945,000 Operating Income or Loss 6,612,000 6,660,000 7,234,000 7,223,000 6,946,000 Interest Expense 395,000 350,000 322,000 199,000 149,000 Total Other Income/Expenses Net -69,000 340,000 314,000 0 ncome Before Tax 6,219,000 7,000,000 7,548,000 7,053,000 6,823,000 ncome Tax Expense 1,300,000 1,637,000 2,679,000 1.995,000 1,982,000 Income from Continuing Operations 4,919,000 5,363,000 4,869,000 5,058,000 4,841,000 Net Income 4,908,000 5,349,000 4,858,000 5,050,000 4,833,000 Net Income available to common s... 4,908,000 5,349,000 4,858,000 5,050,000 4,833,000 Reported EPS Basic 9.09 8.13 8.35 7.72 Diluted 8.89 7.93 8.16 7.58 Weighted average shares outst... Basic 588,500 597,500 604.700 625,600 Diluted 602,000 612,700 618,700 637,200 EBITDA 6,660,000 7,234,000 7,252,000 6,972,000 S u re A Cod 10 . Cling Started. Prerum Newsletters Operating Activities Fiscal year is January-December. All values USD m. 2016 2017 2018 5-year trend Net Income before Extraordinaries 4.878 Depreciation, Depletion & Amortization 5.368 1.490 III 1.39 Depreciation and Depletion Amortization of Intangible Assets 9OM Deferred Taxes & Investment Tax Credit (571) Deferred Taxes (57M) Investment Tax Credit Other Funds (203M) Funds from Operations 6.598 Extraordinaries Changes in Working Capital (152M) Receivables 313) (245M) (305M) Accounts Payable 24M 408M Other Assets/Liabilities (36M) 256M + Net Operating Cash Flow 6.63B 6.42B 6.66B 6.248 6.448 IN Investing Activities 2014 2014 2015 2015 2016 2016 2017 2018 5-year trend Capital Expenditures (1.49B) (1.46B) (1.42B) (1.378) (1.588) Capital Expenditures (Fixed Assets) (1.49B) (1.46B) (1.42B) (1.37B) (1.588) Capital Expenditures (Other Assets) Net Assets from Acquisitions (955M) (2.91B) (16M) (2.02B) Sale of Fixed Assets & Businesses 135M 156M 200M 1.11B 1.12B Purchase/Sale of investments 754M 1.3B (163M) (798M) 669M (1.838) Purchase of investments (1.28B) (652M) (1.41B) (2.15B) Sale/Maturity of investments 2.03B 1.95B 1.258 1.358 2.5B Other Uses (4M) (6M) Other Sources 102M 102M 9M + Net Investing Cash Flow (1.46B) (2.82B) (1.4B) (3.09B) 222M Financing Activities 2014 2015 2016 2017 2018 5-year trend Cash Dividends Paid - Total 12 228) (2.568) 12.68B) 2.88) 3.198) I Common Dividends (2 228) (2.588) (2.688) (2.88) (3.198) Preferred Dividends Change in Capital Stock (4.688) (468) 12.958) (1.33B) Repurchase of Common & Preferred Sik (5.65B) (5.24B) (3.758) (2078) (4.398) " (4.872) | 485M IL Sale of Common & Preferred Stock 96BM 635M 804M 734M Proceeds from Stock Options Other Proceeds from Sale of Stock 968M 635M 804M 734M 485M Issuance/Reduction of Debt, Net 1.013 3.488 1.04B 1.6B 933M Change in Current Debt 27M 860M (797M) 578M 1284M) Change in Long-Term Debt 383M 2.628 1848 1.038 1.228 Issuance of Long-Term Debt 2.61B 3.42B 2.838 1.998 2.258 Reduction in Long-Term Debt (1.638) (800M) (992M) (962M) (1038) 148M 34M Other Funds (42M) (121M) (56M) L Other Uses (19M) (120M) (42M) (121M) TT (56) Other Sources 167M 154M + Net Financing Cash Flow (5.748) (3.65B) (4.63B) (2.668) (6.78) Net Financing Cash Flow (5.74B) (5.74B) (3.65B) 13.558) (4.698) (4.63B) (2662) (2.668) (6.72) P (6.73) Exchange Rate Effect (111M) (54M) (33M) 156M (160M) Miscellaneous Funds Net Change in Cash (684M) (99M) 600M 655M (200M) Free Cash Flow 5.13B 4.96B 5.24B 4.875 4.86B Copyright 2019 Fartet Research Systems in Ant 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. Finally, you can also go to Morningstar.com, which will provide yield to maturity information on the firm's various bond issues. A longer-term issue's YTM could provide an estimate of the firm's current cost of debt to be used in the WACC calculation. 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? MMM Annual Effective Tax Rate (Dec 31 2018) (Dec 31 2017) (Dec 31 2016) (Dec 31 2015) (Dec 31 2014) Y/Y Annual Pre-Tax Income Growth -7.26% 7.02 % 3.37 % -2.89 % 7.07 % Y/Y Annual Income taxes expenses/-benefit Growth -38.9% 34.29 % 0.66% -2.27 % 10.16 % Annual Effective Tax Rate 23.39 % 35.49% 28.29% 29.05% 28.86 % Dec. 31, 2014 Dec. 31, 2013 $ 1,897 $2,581 626 756 4,238 4,253 Consolidated Balance Sheet (USD S) In Millions, unless otherwise specified Current assets Cash and cash equivalents Marketable securities - current Accounts receivable - net of allowances of $94 and $104 Inventories Finished goods Work in process Raw materials and supplies Total inventories Other current assets Total current assets Marketable securities - non-current Investments Property, plant and equipment Less: Accumulated depreciation Property, plant and equipment - net Goodwill Intangible assets - net Prepaid pension benefits Other assets Total assets 1.723 1,790 1,081 1,139 902 935 3,706 3,864 1,298 1,279 11,765 12,733 828 1,453 102 122 22,841 23.068 (14,352) (14,416) 8,489 8,652 7,050 7,345 1,435 1,688 577 1,554 980 31,26933,550 46 Current liabilities Short-lemborowings and current portion of long-term debt Accounts ruvable Accrued payroll Accrued income taxes Other current liabilities Total current liabilities Long-term debt Pension and postretirement benefits Other liabilities Total liabilities Commitments and contingencies (Note 13) 3M Company shareholders' equity: Common stock par value. S.Ol per share, Shares outstanding - 2014:0 635.134 594: Shares outstanding - 2013: 663,296,239 Additional paid in capital Retained earnings 106 1.807 732 435 2,918 5.998 6,731 3.843 1,555 18,127 1.683 1.799 708 417 2,891 7.498 4.326 1.794 1.984 15,602 9 4,379 34,317 4,375 32,416 (19,307) (6,289) 13,109 Treasury stock Accumulated other comprehensive income (loss) Total 3M Company shareholders' equity Noncontrolling interest Total equity Total liabilities and equity (15,385) (3,913) 17,502 446 17,948 $ 33,550 13,142 $31,269 Income Statement All numbers in thousands Get access to 15+ years of historical data with Yahoo Finance Premium. Learn more Breakdown TTM 12/31/2018 12/31/2017 12/31/2016 12/31/2015 Total Revenue 32,131,000 32,765,000 31,657,000 30,109,000 30,274,000 Cost of Revenue 16,842,000 16,682,000 16,001,000 15,040,000 15,383,000 Gross Profit 15,289,000 16,083,000 15,656,000 15,069,000 14,891,000 Operating Expenses Research Development 1,814,000 1,821,000 1,850,000 1,735,000 1,763,000 Selling General and Administrative 6,863,000 7,602,000 6,572,000 6,111,000 6,182,000 Total Operating Expenses 8,677,000 9,423,000 8,422,000 7,846,000 7.945,000 Operating Income or Loss 6,612,000 6,660,000 7,234,000 7,223,000 6,946,000 Interest Expense 395,000 350,000 322,000 199,000 149,000 Total Other Income/Expenses Net -69,000 340,000 314,000 0 ncome Before Tax 6,219,000 7,000,000 7,548,000 7,053,000 6,823,000 ncome Tax Expense 1,300,000 1,637,000 2,679,000 1.995,000 1,982,000 Income from Continuing Operations 4,919,000 5,363,000 4,869,000 5,058,000 4,841,000 Net Income 4,908,000 5,349,000 4,858,000 5,050,000 4,833,000 Net Income available to common s... 4,908,000 5,349,000 4,858,000 5,050,000 4,833,000 Reported EPS Basic 9.09 8.13 8.35 7.72 Diluted 8.89 7.93 8.16 7.58 Weighted average shares outst... Basic 588,500 597,500 604.700 625,600 Diluted 602,000 612,700 618,700 637,200 EBITDA 6,660,000 7,234,000 7,252,000 6,972,000 S u re A Cod 10 . Cling Started. Prerum Newsletters Operating Activities Fiscal year is January-December. All values USD m. 2016 2017 2018 5-year trend Net Income before Extraordinaries 4.878 Depreciation, Depletion & Amortization 5.368 1.490 III 1.39 Depreciation and Depletion Amortization of Intangible Assets 9OM Deferred Taxes & Investment Tax Credit (571) Deferred Taxes (57M) Investment Tax Credit Other Funds (203M) Funds from Operations 6.598 Extraordinaries Changes in Working Capital (152M) Receivables 313) (245M) (305M) Accounts Payable 24M 408M Other Assets/Liabilities (36M) 256M + Net Operating Cash Flow 6.63B 6.42B 6.66B 6.248 6.448 IN Investing Activities 2014 2014 2015 2015 2016 2016 2017 2018 5-year trend Capital Expenditures (1.49B) (1.46B) (1.42B) (1.378) (1.588) Capital Expenditures (Fixed Assets) (1.49B) (1.46B) (1.42B) (1.37B) (1.588) Capital Expenditures (Other Assets) Net Assets from Acquisitions (955M) (2.91B) (16M) (2.02B) Sale of Fixed Assets & Businesses 135M 156M 200M 1.11B 1.12B Purchase/Sale of investments 754M 1.3B (163M) (798M) 669M (1.838) Purchase of investments (1.28B) (652M) (1.41B) (2.15B) Sale/Maturity of investments 2.03B 1.95B 1.258 1.358 2.5B Other Uses (4M) (6M) Other Sources 102M 102M 9M + Net Investing Cash Flow (1.46B) (2.82B) (1.4B) (3.09B) 222M Financing Activities 2014 2015 2016 2017 2018 5-year trend Cash Dividends Paid - Total 12 228) (2.568) 12.68B) 2.88) 3.198) I Common Dividends (2 228) (2.588) (2.688) (2.88) (3.198) Preferred Dividends Change in Capital Stock (4.688) (468) 12.958) (1.33B) Repurchase of Common & Preferred Sik (5.65B) (5.24B) (3.758) (2078) (4.398) " (4.872) | 485M IL Sale of Common & Preferred Stock 96BM 635M 804M 734M Proceeds from Stock Options Other Proceeds from Sale of Stock 968M 635M 804M 734M 485M Issuance/Reduction of Debt, Net 1.013 3.488 1.04B 1.6B 933M Change in Current Debt 27M 860M (797M) 578M 1284M) Change in Long-Term Debt 383M 2.628 1848 1.038 1.228 Issuance of Long-Term Debt 2.61B 3.42B 2.838 1.998 2.258 Reduction in Long-Term Debt (1.638) (800M) (992M) (962M) (1038) 148M 34M Other Funds (42M) (121M) (56M) L Other Uses (19M) (120M) (42M) (121M) TT (56) Other Sources 167M 154M + Net Financing Cash Flow (5.748) (3.65B) (4.63B) (2.668) (6.78) Net Financing Cash Flow (5.74B) (5.74B) (3.65B) 13.558) (4.698) (4.63B) (2662) (2.668) (6.72) P (6.73) Exchange Rate Effect (111M) (54M) (33M) 156M (160M) Miscellaneous Funds Net Change in Cash (684M) (99M) 600M 655M (200M) Free Cash Flow 5.13B 4.96B 5.24B 4.875 4.86B Copyright 2019 Fartet Research Systems in Ant