Next, we need to calculate MMM’s cost of debt. Unfortunately, Thomson One doesn’t provide a direct measure of the cost of debt. However, we can use different approaches to estimate it. One approach is to take the company’s long-term interest expense and divide it by the amount of long-term debt. This approach only works if the historical cost of debt equals the yield to maturity in today’s market (that is, if MMM’s outstanding bonds are trading at close to par). This approach may produce misleading estimates in years in which MMM issues a significant amount of new debt. For example, if a company issues a lot of debt at the end of the year, the full amount of debt will appear on the year-end balance sheet, yet we still may not see a sharp increase in interest expense on the annual income statement because the debt was outstanding for only a small portion of the entire year. When this situation occurs, the estimated cost of debt will likely understate the true cost of debt. Another approach is to try to find this number in the notes to the company’s annual report by accessing the company’s home page and its Investor Relations section. Alternatively, you can go to other external sources, such as www.bondsonline.com, for corporate bond spreads, which can be used to find estimates of the cost of debt. Remember that you need the after-tax cost of debt to calculate a firm’s WACC, so you will need MMM’s tax rate (which has averaged about 37 percent in recent years). What is your estimate of MMM’s after-tax cost of debt?

Access the Thomson ONE problems though the ThomsonNOW Web site. Use the Thomson

ONE—Business School Edition online database to work this chapter’s questions.

Calculating 3M’s Cost of Capital In this chapter we described how to estimate a company’s WACC, which is the weighted average of its costs of debt, preferred stock, and common equity. Most of the data we need to do this can be found in Thomson One. Here, we walk through the steps used to calculate Minnesota Mining & Manufacturing’s (MMM) WACC.