Question

3M Company was founded in 1902 in the U.S. 3M is well known for its Post-it® Notes. In 2003, 3M introduced Post-it® Super Sticky Notes, an enhanced Post-it® Notes product for use on vertical and hard-to-stick surfaces. 3M had developed a prototype of this enhanced Post- it® Notes using solvent-based adhesive formulations during the late 1990s, but did not release the stickier Post-it® Notes because of the Volatile Organic Compounds (VOCs) in the formulation. 3M delayed introducing the product until it was able to develop a new, water- based adhesive formulation. 3M's new water-based formulation had the desired sticking power, while generating fewer air emissions, and was less expensive to manufacture than the proposed solvent-based formulations that 3M had originally developed. According to Keith Miller, Manager, Environmental Initiatives and Sustainability Group, who said that the lost opportunity costs of delaying the Post-it® Super Sticky Notes were substantial, which could offset all the profits generated from the sale of Super Sticky Notes. 3M reports that the new formulations emit less VOC emissions and less Toxic Release Inventory (TRI) emissions annually than if the proposed solvent-based process had been implemented. (1) Suppose that 3M just paid a dividend of DO = $1.32. Analysts expect the company's dividend to grow by 30% in 2004, 10% in year 2005, and a constant rate of 5% in 2006 and therefore, as they believe that customers are more willing to pay for the green product Post-it® Super Sticky Notes. The required return on 3M is 9.00%. What is the best estimate of 3M's current market value? (2) Is 3M's delaying decision justified? Answer the question using the shareholder wealth maximization theory and the stakeholder theory and compare the two theories in explaining the delaying decision. [Hints: analyze the costs and benefits of 3M's decision and the potential ethical considerations. No calculation is required.]

Answer 1

1). Value per share = 44.87

2006 2003 0 2004 1 30% 1.721 2005 2 10% 1.89 Year 1 Formula Time (n) Growth rate (g) Dn = Dn-1*(1+gn) Dividend (D) D3/19%-g3) Terminal value (TV) CF2 = D2 + TV Cash Flow (CF) CF/(1+9%)^n PV of CFS Sum of all PVS Value per share 5% 1.98 49.551 51.44 43.29

2). Shareholder wealth maximization theory holds that the main objective of a corporate is to ensure maximum monetary gain for its shareholders. Stakeholder theory, on the other hand, broadens the responsibilities of a corporate and holds that a corporate has to create value for all its stakeholders including customers, employees, suppliers, communities and the larger society.In 3M's case, going by the wealth maximization theory, the delaying decision was not justified as it led to monetary loss for the company. However, when seen in the broader context of 3M's responsibility towards all stakeholders and its conduct as a global company of renown known for its high standards, the decision to delay makes sense. Such actions increase stakeholder confident in a company which can, in the future, translate to monetary gain as well since a company's reputation is also significant in determining its profit/loss over a period of time.