a. Recall that the weights used in the WACC are based on the company’s target ca
ID: 2798508 • Letter: A
Question
a. Recall that the weights used in the WACC are based on the company’s target capital structure. If we assume that the company wants to maintain the same mix of capital that it currently has on its balance sheet, what weights should you use to estimate the WACC for MMM?
b. Find MMM’s market capitalization, which is the market value of its common equity. Using the sum of its short- 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 the WACC equation. These weights are approximations of market-value weights. Be sure not to include accruals in the debt calculation
Market summary >3M Co NYSE: MMM-Dec 6, 1:08 PM EST 240.43 USD2.17 (0.91%)Explanation / Answer
1. Values as per balancesheet for year 2016:
Total equity= $10,298,000
Short term debt= $972,000
Long term debt= $10,678,000
Total capital of 3M= $21,948,000
Equity percentage to be used in WACC calculation= 10,298,000/21,948,000= 46.92%
Debt percentage= (972,000+10,678,000)/21,948,000= 53.08%
It appears that the company is using greater portion of leveraged capital.
2. Market capitalization of common equity is already given at $145,869. If we use this value instead of $9,000, our new weights for WACC calculation will be
Total equity= $10,298,000-9,000+145,869= $10,434,869
Total debt is same as before= $11,650,000
New total capital of 3M= 10,434,869+11,650,000= $22,084,869
New weight for equity= 10,434,869/22,084,869= 47.25%
New weight for debt= 11,650,000/22,084,869= 52.75%
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