L Should the company use TAKING A CLOSER Loo K questions that information Use online resources to may limit ability to answer some of these changes over time, a these changes CALCULATING 3M's CoST oF CAPITAL In this chapter, we described how to estimate a WACC, which is the weighted avera costs of debt, preferred stock, and common equity. Most of the data we need to do this can be found k the steps used to calculate of various data sources on the Internet. Here we wal & (MMM) WACC. Discussion Questions 1. As a first step, we need to estimate what percentage of MMM's capital comes from debt, preferred stock and common equity. This information can be found on the latest annual balance sheet. (As year end 201 had preferred stock Total debt includes all interest-bearing debt and is the sum of short-term debt long-term debt. based on the company's target capital structure. If we assume tha a. Recall that the weights used in the WACC are has on its balance sheet, what to maintain the same mix of capital that it currently the company wants MMM? use estimate the WACC for b. Find market capitalization, which is the market value of its common equity. Using the sum of its hot. term debt and long-term debt from the balance sheet (we assume that the market value of its debt equals its book value) and its market capitalization, recalculate the firm's debt and common equity weights to be used in te WACC equation. These weights are approximations of mar weights. sure include accruals the debt calculation. 2 Once again we can use the CAPM to estimate MMM's cost of equity. From the Internet, you can find a numberd different sources for estimates of beta-select the measure that you think is best, and combine this with your estimate of the risk-free rate and the market risk premium to obtain an estimate of its cost of equity. (See the Taking a Coe Look problem in Chapter 8 for more details) What is your estimate for MMM's cost of equity? Why might much sense to use the DCF approach to estimate MMM's cost of equity