For 3M Company, Using the facilities of ValuePro (http://www.valuepro.net) for t

Question

For 3M Company, Using the facilities of ValuePro (http://www.valuepro.net) for the company that you have selected to study conduct a discounted cash flow valuation. The analysis should explain each variable used in the analysis, why you accepted the given input, or how and why you changed a variable. The analysis should also examine the relevant cash flows, compare the final valuation to the stock’s current price and explain any differences. (Note: Remember to adjust the equity risk premium to between 5% and 6%; also, adjust the growth rate to an appropriate long-term growth rate.)

Intrinsic Stock Value 145.06 Excess Return Period (yrs) 10 Depreciation Rate (% of Rev) 4.31 Revenues ($mil) 30052 Investment Rate (% of Rev) 4.96 Growth Rate (%) 7.5 Working Capital (% of Rev) 20.52 Net Oper. Profit Margin (%) 20.92 Short-Term Assets ($mil) 13855 Tax Rate (%) 28.972 Short-Term Liab ($mil) 6041 Stock Price ($) 156.73 Equity Risk Premium (%) 3 Shares Outstanding (mil) 690.2 Company Beta 0.8925 10-Yr Treasury Yield (%) 5 Value Debt Out. ($mil) 4864 Bond Spread Treasury (%) 1.5 Value Pref. Stock Out. ($mil) 0 Preferred Stock Yield (%) 7.5 Company WACC(%) 7.55

Explanation / Answer

Net operating profit margin = 20.92%

Revenue = $30,052 million

Net operating profit = $30,052 million * 20.92% = $6,286.88 million

Tax rate = 28.972%

Post tax operating profit = $4,465.45 million

The net operating profit is derived after deducting Depreciation. However depreciation is not a cash flow, hence it is added back to the post tax operating profit.

Depreciation = 4.31% of revenue = 4.31% * $30,072 million = $1,296.10 million

Change in Investment = 4.96% of growth in revenue = 4.96% * ($30052 million * 7.5%) = $111.79 million

Working capital investment = 20.52% of gowth in revenue = $462.50 million

Free cash flows to the company = $4,465.45 + $1,296.10 - $111.79 - $462.50 = $5,187.26 million

This annual free cash flows to the company is discounted using the Wieghted average cost of capital (WACC) over the excess return period to get the cash flow from operations

WACC = 7.55%

Excess return period = 10 years

Cash flow from operations = $5,187.26(1+0.075) / (1+0.0755)10 = $5576.30 / 2.0706 = $2,693.08

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