3M Company MMM For calculating the current stock price All t

3M Company (MMM) For calculating the current stock price:

All three methods, Bond Yield Plus, Dividend Discount Model, the Capital Asset Pricing Model, must be employed to calculate the average cost of common equity.

Find the most recent annual dividend paid by the company either from the financial news and data outlets such as Yahoo Finance, Google Finance, Forbes, Bloomberg, etc. or from the company’s financial statements.

If the dividend is paid quarterly or during any other interval, then you must annualize the dividend. For example if $0.25 is the quarterly dividend, then assume a $1 annual dividend. If dividend is already annualized, you must use that figure.

For growth rate, refer to the sources that the textbook chapter 11 states. If growth rate is not available then calculate the growth rate from the annual dividend paid three years ago. Use the most recent annual dividend as FV, the annual dividend paid three years ago as PV, and three as N to solve for I/Y. If it returns a negative growth, then assume 6 percent growth rate.

Solution

The dividends that were paid by business in the year 2017 = 1.175 quarterly .

So annual dividend = 1.175*4 = $4.70

Annual dividend paid three years ago = 0.855 quarterly = 0.855*4 = $3.42

So, FV = 4.70, PV = 3.42 , N= 3, I/Y =?

When we solve for I/Y, we get 11.18%

Growth rate (g)= 11.18%

As per the CAPM, we have cost of equity = rf + beta *(rm - rf) . We assume risk free rate to be the 10 year bond yield = 2.82%, the market return (historical dow jones return ) = 10%

Cost of equity using CAPM= 2.82 + 1.08*(10-2.82) = 10.57%

Using dividend discount model, we have cost of equity = D1/P0 + g = 4.70*1.1118/195.83 +0.1118 = 13.85%

Using Bond Yield Plus method risk premium

Risk premium = 10-2.82 = 7.18% and bond yield of the company = 3.38%

Bond yield plus , cost of equity = 3.38 + 7.18 = 10.56%