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FNBSLW 735 Final Project Instructions The final project has two purposes

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FNBSLW 735 Final Project Instructions The final project has two purposes. First, it is designed for you to consolidate and apply the cash flow and cost of capital estimation procedures, and use the three-step DCF approach to value a real-world company. Second, you will also apply the relative valuation method using market comparables. The company of interest is 3M (Ticker Symbol: MMM). You are provided a spreadsheet containing the relevant financial statements, and you will download stock price from Yahoo! Finance. You will deliver an Excel spreadsheet, and a written report for this final project. Keep in mind that your target audience of the presentation and the written report is the Chief Financial Officer (CFO), who is interested in the rationale of your analysis, but may not wish to see all the technical details in the written report. You should include all Excel tables in your analysis that you think is suitable to be presented to the CFO. If you believe certain tables are too long to be presented in the written report, and are not absolutely necessary to be presented, you should keep them in your Excel file only. In your written report, you should provide explanation for any analysis that requires your judgement, for example, your reason for picking particular firms as comparison firms. You should avoid technical language in your written report, but instead, focus on the implications of your estimated numbers on firm risk and value, in other words, what your analysis tells you about the risk and value of the firm. For example, if your regression generates a beta of 1.2, you not only want to report the number, but also need comment on what the beta tells you about the risk of the company. Your submission includes two files: the Excel file of the analysis, and the written report. All files should be submitted via Canvas by the deadline.

Part 1: Cash Flow Estimation Estimate the free cash flow of 2019 under the following assumptions. Assumptions: 1. Year 2019 sales projection: $31,556,000,000 2. All the other income statement accounts are assumed to hold a constant percentage as sales. The percentage is the average percentage of fiscal years 2016, 2017 and 2018. 3. Investment in net operating working capital and capital expenditure are assumed to stay perpetually as the average of year 2017 and 2018. Requirements: 1. Build common size income statements for year 2016, 2017 and 2018. 2. Prepare a pro forma income statement for year 2019. 3. Prepare a pro forma balance sheet for year 2019. Note that, in this case, you only need to include information related to your capital expenditure and changes in operating net working capital in your pro forma balance sheet. 4. Forecast annual free cash flow of 3M in 2019.

Part 2: Cost of Capital Estimation Estimate the weighted average cost of capital of 3M under the following assumptions. Assumptions: 1. Beta of debt equals 0.04. 2. The firm has no preferred stocks. Requirements: 1. Use daily price data of January 31, 2016 to December 31, 2018, and the Fama-French three factors daily loading during the same window to estimate the beta coefficients of the market premium, size premium and valuation premium for 3M. 2. Using the daily factor loadings between January 1, 2019 and June 30, 2019, and your estimated coefficient to forecast the daily cost of equity of 3M between January 1, 2019 and June 30, 2019. Note that, the forecasted return is a daily return estimation. You should take the average daily cost of equity and annualize it to get annual cost of equity, and apply it to the WACC formula. 3. Assume the weight of debt is 49.62%. Estimate the WACC of 3M. 4. Watch the video posted on Canvas as an example for how you should complete Part 2 of the project. Part 3: Firm Valuation Three-step DCF Approach Assume the company has perpetual constant free cash flow every year starting 2019, and the firm has 576,575,000 shares outstanding. 1. Forecast the value of 3M and the value of its equity using the WACC approach. 2. Using the information on the number shares outstanding, estimate the stock price of 3M on as of Jan 1st, 2019. Relative Valuation Approach Using Market Comparables 1. Choose two comparison firms in the same industry. 2. Calculate the P/E ratios of the comparison firms in Jan. 2019. 3. Using the average P/E ratio of the comparison firms, estimate the stock price of 3M as of Jan 1st, 2019.

FNBSLW 735 Final Project Grading Rubrics The final project Excel and written report account for 15% and 10% of the final grade, respectively. Both parts are graded out of 100 points. Below are the grading rubrics.

1. Completeness: 25 points a. The written report should include all required sections, and necessary tables need for the analysis, all completed with reasonable effort. b. The excel spreadsheet should include all the tables in the written report, plus any other working tables, such as the data used for the regressions. All the calculations used in the analysis should be found in formulas in your spreadsheet.

2. Quality of your analysis: 40 points a. Your report should contain analysis that is useful to the understanding the valuation of the firm; b. All your statements should be supported by quantitative facts or qualitative analysis. In other words, you do not want to any remarks that you cannot fully explain. c. Your will also be graded on the correctness of your procedure.

3. Formatting: 10 points a. The report should be professionally formatted, and easy to read. It should be structured with clear section/subsection headings. All tables should be formatted with headings, proper border lines, and necessary legends.

4. Writing: 25 points a.

Grammar- and spelling-check the report. Use professional business writing style, in other words, keep your report concise, but complete and informative. Your goal is to convey as much information as possible without verbosity. Written report should include the basic sections: introduction, analysis and conclusion. You can structure your analysis section into subsections according to the steps your follow. b. The introduction section should provide an overview of the purpose of the project, the overall structure of the analysis, and a brief summary of your findings. c. The conclusion section should briefly summarize your findings again. Avoid direct copy-paste of the introduction. In addition, the conclusion also differs from the introduction in that you will offer your subjective opinion of 3M’s value based on your analysis. For example, does the valuation your analysis concludes make sense? Is the valuation of the company reasonable to you? If not, what might be causing the problem? You should also give your thoughts on the comparison of the valuation results using different methods (relative valuation using multiples vs. traditional DCF approach). There may not be definitive right or wrong answers to these questions, but it is important that you can justify your own opinion. Albert Einstein once said “Education is what remains after one has forgotten what one has learned in school”. Use this final project as an opportunity of exploration, and building a bridge that will take you from the classroom to the real business world!