Discounted Cash Flow (DCF)

Discounted Cash Flow is a valuation technique that is utilized in order to calculate the present

value of an investment on the basis of its future cash flows. These cash flows are discounted by

using the weighted average cost of capital for the investment. The DCF analysis is used to find

out the present value of a company on the basis of how much money the company is going to

generate in future. (Chen, 2019)

The Abnormal profit growth Model

The abnormal profit growth model is a method for finding out the equity value of a company' on

the basis of its book value and its profits. It looks at if the decisions of the management would

cause a company to perform worse of better than the expectations. (Kenton, 2019)

It is calculated with Abnormal earnings and with abnormal NOPAT.

Cost of Debt

The cost of debt is the rate of interest that a company pays on its loan. This loan includes both

bonds that the company issues and the loan from banks and other financial institutions. We

normally use the after-tax cost of debt which is the cost of debt net of interest rate because the

interest expense is tax-deductible. Although the company 3M has not paid any interest expense

according to its income statement for 2018, which was to be used in preparing the analysis.

However, the average rate of interest of 2.4% is used according to the results for the quarter

ending September 2019. The annualized positive value of Interest Expense for the quarter that

ended in September 2019 was $436 Million. 3M Company’s average total debt for the quarter

that ended in September 2019 was $18,468 Million. Therefore, 3M Company’s annualized
effective interest rate on debt for the quarter that ended in September 2019 was 2.4% that we

used on forecasting assumptions sheet.

WACC

WACC is the weighted average cost of capital for a company. It is the average of the cost of debt

and cost of equity in accordance with their respective weights in the capital. As the company has

not shown any interest expense in the 2018 income statement, therefore the effective cost of

capital is zero. However, we used the 2019 cost of debt as explained above for calculating the

WACC which is 4.99%, as shown on the valuation sheet. (Hargrave, 2019)

Risk-Free Rate

The risk-free rate is the return on the investment that has no risk (Chen, 2019). The rate of US

treasury bills is used as a risk-free rate which is 1.84%.

Number of Shares

The number of shares used for the purpose of the analysis is the actual outstanding shares of 3M

as provided in its 2018 financial statements which are 149,200,000,000.

ASSUMPTIONS
Cost of equity 8% Percentage
Required return on operating assets 10.0% Percentage
Risk-free rate 1.8% Percentage
Terminal growth rate 3.0% Percentage
Cost of debt 2.4% Percentage
Debt to capital 57.0% Percentage
Equity % 43.0% Percentage
WACC 4.99% Percentage
Number of shares outstanding 149,200,000,000
References

Chen, J. (2019). Discounted Cash Flow (DCF). Retrieved from:

https://www.investopedia.com/terms/d/dcf.asp

Chen, J. (2019). Risk-Free Rate of Return. Retrieved from:

https://www.investopedia.com/terms/r/risk-freerate.asp'

Hargrave, M. (2019). Weighted Average Cost of Capital – WACC. Retrieved from:

https://www.investopedia.com/terms/w/wacc.asp

Kenton, W. (2019). Abnormal Earnings Valuation Model Definition. Retrieved from:

https://www.investopedia.com/terms/a/abnormal-earnings-valuation-model.asp