Midland Energy Resources Inc.: Cost Of Capital
Introduction
Midland Energy Resources have a senior vice president, Janet Mortension, of project finance. She was preparing her annual cost of capital for midland as well as for each of its following three divisions:
* Exploration & production (E&P)
* Refining & Marketing (R&M)
* Petrochemicals
Midland was a global company with operations in oil and gas. Midland corporate treasury had began analysis and preparation of annual cost of capital for the corporation as a whole and for each divisions as part of annual capital budgeting process but this estimates were often criticized, and Midland division presidents and controllers sometimes challenged specific assumptions and inputs. The case uses comparable companies to estimate asset and beta for each individual division, and must comply the capital asset pricing model for calculating the cost of capital. Midland was conservative compared to some of its large competitors, but it has a group of trader in- house who actively managed currency. Interest rate and commodity risks within a set of guideline approved by the Board.
Midland Energy Resources ha d been incorporated more than 120 years previously and in 2007 had more than 80,000 employees.
Midland’s financial strategy in 2007 was founded on the following four pillars:
* Oversees Growth
* Value- Creating Investment
* Optimal capital structure
* Stock Repurchases
Oversees Growth:
Oversees investment were the main engine of growth for most large U.S producers and Midland was no exception. Midland usually invested in foreign projects alongside as a foreign business or a local business as partner. Midland and its foreign partner shared the equity interest, with the foreign partner generally at least 50% plus a preferred return.
Value - Creating Investment:
Midland used discounting cash flow methodologies to