...BRIEF INFORMATION ABOUT MIDLAND ENERGY RESOURCES Midland Energy Resources was a global energy company with operations in oil and gas exploration and production (E&P), refining and marketing (R&M), and petrochemicals. It had been incorporated more than 120 years and had more than 80,000 employees in 2007. Its consolidated operating revenue, operating income and total assets were $248.5 billion, $42.2 billion and $262.4 billion respectively in 2006. Midland’s E&P division operated in all parts of exploration, development, and production of which production was the dominant operation according to operating results reported in 2006. Also E&P is the most profitable division of Midland. On the other hand, R&M is the largest division in terms of revenue. Midland had ownership interests in 40 refineries all over the world. In the field of this division, there was stiff competition. Midland’s technology is advanced and with the vertical integration it makes Midland market leader in this business. The smallest division of Midland is petrochemicals. Midland’s financial and investment strategies for 2007 was built on four pillars, which are to fund overseas growth, to invest in value-creating project across all divisions, to optimize its capital structure, and to repurchase undervalued shares. Midland used estimates of cost of capitals in many analyses such as asset appraisals for both capital budgeting and financial accounting, performance assessments, M&A proposals, and stock repurchase...
Words: 2660 - Pages: 11
...Midland Energy Resource Case Analysis I. Midland’s capital planning model and Janet Mortensen's role. The capital-planning model adopted by Midland is MACC, standing for weighted average cost of capital. The primary role of Janet Mortensen is frequently calculating corporate and divisional costs of capital at division level as well as corporate level. In addition, she also needs to check the appropriateness of her calculation and append “user`s guide” to it. Evaluating M&A proposals, stock repurchase decision, and performance assessment. II. Brief Explanation: cost of capital, WACC, and CAPM. Cost of capital: the cost of corporate`s fund, including debt and equity. It is the minimum return rate that shareholders, investors, and lenders expect to compensate their risks. It is also the minimum profit that corporate tends to generate. WACC: weighted average cost of capital. It is a way to calculate cost of capital based on company`s financial structure. It gives corresponding weight to different source of funds, which required different rate of return. CAPM: capital asset pricing model. This model calculates the expected return of shareholders by risk-free rate, measure of systematic risk, and equity market risk premium. III. Address what you use “cost of capital” to evaluate. How are Mortensen’s estimates used at Midland? I will use “cost of capital” to evaluate the followings: 1. Planning investment. If this investment will meet the requirement; 2...
Words: 709 - Pages: 3
...Executive Summary: Midland Energy Resources, Inc. is a global energy company with a broad array of products and services. The company operates within three different operations including oil and gas exploration and production (E&P), refining and marketing (R&M), and petrochemicals. Midland has proven to be a very profitable company, with reported operating revenue of $248.5 billion and operating income of $42.2 billion. The company has been in business for over 120 years and employed more than 80,000 individuals. Janet Mortensen, the senior vice president of project finance for Midland Energy Resources, has been asked to calculate the weighted average cost of capital (WACC) for the company as a whole, as well as each of its three divisions as part of an annual budgeting process. Midland’s Three Divisions: Exploration & Production Oil exploration and production (E&P) is Midland’s most profitable business, and its net margin over the previous five years was among the highest in the industry. With oil prices at historic highs in early 2007, Midland anticipated heavy investment in acquisitions of promising properties, in development of its proved undeveloped reserves, and in expanding production. They also needed to account for competition from areas such as the Middle East, Central Asia, Russia, and West Africa. Refining and Marketing Midland had ownership interests in forty refineries around the world with distillation capacity of five million barrels a day. Measured by revenue...
Words: 1750 - Pages: 7
...Executive Summary: Midland Energy Resources, Inc. is a global energy company with a broad array of products and services. The company operates within three different operations including oil and gas exploration and production (E&P), refining and marketing (R&M), and petrochemicals. Midland has proven to be a very profitable company, with reported operating revenue of $248.5 billion and operating income of $42.2 billion. The company has been in business for over 120 years and employed more than 80,000 individuals. Janet Mortensen, the senior vice president of project finance for Midland Energy Resources, has been asked to calculate the weighted average cost of capital (WACC) for the company as a whole, as well as each of its three divisions as part of an annual budgeting process. Midland’s Three Divisions: Exploration & Production Oil exploration and production (E&P) is Midland’s most profitable business, and its net margin over the previous five years was among the highest in the industry. With oil prices at historic highs in early 2007, Midland anticipated heavy investment in acquisitions of promising properties, in development of its proved undeveloped reserves, and in expanding production. They also needed to account for competition from areas such as the Middle East, Central Asia, Russia, and West Africa. Refining and Marketing Midland had ownership interests in forty refineries around the world with distillation capacity of five million barrels a day....
Words: 1751 - Pages: 8
...[pic] Midland Energy Resources, Inc. Cost of Capital Table of Contents I. Executive Summary II. Introduction III. Cost of Capital IV. Risk & Tax Rate V. Capital Structures VI. WACC VII. Conclusion VIII. References I. Executive Summary Midland Energy Resources is a global energy company with operations in oil and gas exploration and production(E&P) providing a broad array of products and services to upstream oil and gas customers worldwide including refining and marketing (R&M), natural gas, and petrochemicals. Janet Mortensen, the senior vice president of project finance for Midland Energy Resources must determine the weighted average cost of capital (WACC) for the company as a whole and each of its divisions as part of the annual capital budgeting process. Various considerations have to be evaluated as risk factors when calculating the cost-of capital. II. Introduction Midland Energy Resources is a leading global energy developer dedicated to providing advanced power systems and energy services around the world. Midland Energy Resources has three divisions Exploration & Production, Refining & Marketing, and Petrochemicals. They have been incorporated more than 120 years previously and they have 80,000 employees in 2007. Exploration & Production business include oil and natural gas exploration and field development and production is there most profitable business with the highest net margin...
Words: 1216 - Pages: 5
... Case Study Questions: Midland Energy Resources, Inc: Cost of Capital Janet Mortensen, senior vice president of project finance at Midland Energy Resources, is in the process of preparing her annual cost of capital estimates for Midland and each of its three divisions (oil and gas exploration and production (E&P), refining and marketing (R&M), and petrochemicals). These estimates are used in many analyses within Midland, including capital budgeting decisions, financial accounting, performance appraisals, M&A proposals, and stock repurchase decisions. There has been some disagreement in the past about specific inputs and assumptions used to arrive at the cost of capital estimate, so Mortensen needs to devote extra care in preparing the cost of capital estimates and justifying her assumptions. These questions relate to the Midland Energy Resources, Inc: Cost of Capital case. You can find the data for this case on the course website in a spreadsheet named: Midland Energy Resources Exhibits.xls. 1. For what purposes does Mortensen estimate Midland’s cost of capital? What would be the potential consequences of a too high estimate compared to the firm’s “true” cost of capital? What about a too low estimate? Mortensen estimates Midland’s cost of capital to use for other analyses within Midland such as capital budgeting and financial accounting, performance assessments, M&A proposals, and stock repurchase decisions. If the cost of capital is too high, Midland could...
Words: 532 - Pages: 3
...Midland Energy 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...
Words: 305 - Pages: 2
...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...
Words: 1046 - Pages: 5
...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...
Words: 1045 - Pages: 5
...MIDLAND ENERGY Overview: Midland and Midland’s Divisions: E&P, R&M, and Petrochemicals. Midland Energy Resources Inc. is the global energy company with a broad array of products and services. The company has been in business for over 120 years. The company operates within three different operations: 1. Exploration and Production (E&P) is the most profitable segment. With oil prices at historic highs in 2007, Midland anticipated heavily investment in acquisitions of promising properties. Competition from areas such as the Middle East, Central Asia, Russian and West Africa should be taken into account. 2. Refining and Marketing (R&M) is the largest, however margins had declined steadily over the previous twenty years. 3. Petrochemicals the smallest division. Midland owned 25 manufacturing facilities and 5 research centers around the world. Janet Mortensen, the vise president, has been asked to calculate the weighted average cost of capital (WACC) for each division as well as for the company as a whole. The primary goals of Midland’s financial strategy: * to fund significant overseas growth; * to invest in value – creating projects across all divisions; * to optimize its capital structure; and * to opportunistically repurchase undervalued shares. Janet Mortensen’s estimates of cost of capital were used for the following analysis: * Asset appraisal – asset valuation * Capital Budgeting – DCF, NPV and allocation of...
Words: 950 - Pages: 4
...Midland Energy Resources Case Analysis Midland Energy Capital Planning Model • Fund significant overseas growth • As domestic natural resources dwindle, overseas investments are the main drivers of growth for Midland. These investments are analyzed and evaluated is US dollars (foreign cash flows are converted to US dollars) and have a US dollar discount rate applied to them. In 2006, 77.7% of Midland’s total earnings from equity affiliates came from non-US investments. • Invest in value creating projects across all divisions • Midland generally used traditional discounted cash flow methods to evaluate potential projects and investments. Some overseas projects were analyzed as streams of future equity cash flows, and were discounted based on cost of equity as a result. Once funded, a project/investment’s performance was measure in two ways. The first being actual performance vs forecasted plan over 1, 3, and 5 year periods, and the second being Economic Value Added (EVA). EVA was calculated as: EVA = EBIT(1-t) – WACC(period capital expenditure) Midland Energy Capital Planning Model • Optimize capital structure • Midland primarily optimized its capital structure by taking advantage of the borrowing capacity inherent in its energy reserves and long term assets, such as refining facilities. Midland maintained an optimal debt level which was based on energy prices and its own stock prices. This practice allowed them to shield additional profits from...
Words: 1261 - Pages: 6
...Executive Summary Midland Energy Resources is a leading global energy developer dedicated to providing advanced power systems and energy services around the world. Midland Energy Resources has three divisions Exploration & Production, Refining & Marketing, and Petrochemicals. They have been incorporated more than 120 years previously and they have 80,000 employees in 2007. Janet Mortensen, the senior vice president of project finance for Midland Energy Resources must determine the weighted average cost of capital (WACC) for the company as a whole and each of its divisions as part of the annual capital budgeting process. As each division has different functions and risk associations, the company needs separate discount rate to evaluate its projects. This report is prepared to find out the realistic measures for assessing cost of capital for Midland Energy Resources. After careful evaluation of available information and using finance literature and relevant course lectures, the analysis is prepared to offer appropriate recommendations for Midland Energy Resources to make future capital budgeting decisions. Company Overview Midland Energy Resources is a global energy company with operations in oil and gas exploration and production (E&P) providing a broad array of products and services to upstream oil and gas customers worldwide including refining and marketing (R&M), natural gas, and petrochemicals. Exploration & Production business, including oil and natural gas exploration and...
Words: 1864 - Pages: 8
...Executive Summary Midland Energy Resources is a leading global energy developer dedicated to providing advanced power systems and energy services around the world. Midland Energy Resources has three divisions Exploration & Production, Refining & Marketing, and Petrochemicals. They have been incorporated more than 120 years previously and they have 80,000 employees in 2007. Janet Mortensen, the senior vice president of project finance for Midland Energy Resources must determine the weighted average cost of capital (WACC) for the company as a whole and each of its divisions as part of the annual capital budgeting process. As each division has different functions and risk associations, the company needs separate discount rate to evaluate its projects. This report is prepared to find out the realistic measures for assessing cost of capital for Midland Energy Resources. After careful evaluation of available information and using finance literature and relevant course lectures, the analysis is prepared to offer appropriate recommendations for Midland Energy Resources to make future capital budgeting decisions. Company Overview Midland Energy Resources is a global energy company with operations in oil and gas exploration and production (E&P) providing a broad array of products and services to upstream oil and gas customers worldwide including refining and marketing (R&M), natural gas, and petrochemicals. Exploration & Production business, including oil and...
Words: 1886 - Pages: 8
...Midland Energy Resources, Inc.: Cost of Capital Case Solution Total Words: 1930 Excel Calculations: Return on Debt, T-Bills Return, Yield Spread, Beta, Return on Equity, WACC for Midland, Exploration and Production, Refining and Marketing and Petrochemicals. Abstract: Midland Energy Resources has its operations divided amongst three separate divisions. The divisions have different functions and need separate discount rate to evaluate its projects. The cost of capital is very critical in Midland as it used for many diverse purposes. Therefore, it is important to calculate an accurate cost of capital. The Weighted Average Cost of Capital is used to discount Midland’s cash flows. Cost of debt is comparatively easier to calculate using a ‘bond yield plus risk premium’ approach. The cost of equity is calculated using the Capital Asset Pricing Model (CAPM). In CAPM, the calculation of beta requires significant judgment. Industry data is used to calculate the beta, but such data is not available for one of the divisions where an alternative method is applied. There is also some controversy in using the market risk premium: the historical risk premium for US stocks significantly differs from the risk premium used in the industry. By making certain assumptions about these variables, four separate costs of capital are estimated for Midland and its three divisions. Word Writeup: 1.What should be the cost of capital for Midland operational divisions? ...
Words: 414 - Pages: 2
...October 10, 2012 i. Risk-Free Rate Risk-free rates will depend on when the cash flow is expected to occur and depend upon the period over which investors want the return to be guaranteed. Consequently, we need to take the time horizon into consideration to find out the most suitable risk-free rate. Midland Energy Resources is a well-established company with 120-year history. It is not a company which relies on seeking special opportunity to earn instant profit so that 1-Year T-bond rate is obviously not a proper option. Instead, a long-term development is expected through capital allocation. Here, we choose 30-Year over 10-Year T-bond rate. Someone may argue that 10-Year is suitable since long-term expected cash flow will be affected by political risk in the Exploration and Production division. This may be true but the company also plans to invest in sophisticated extraction method to extend the lives of older fields as well as developing undeveloped reserves. With such heavy investment the company could not expect a shorter return period and all of these methods may shield the company from those negative affects to some extent. The 30-Year T-bond rate is also preferred by examining the other two divisions. The Refining and Marketing, which is the company’s largest division in aspect of revenue, has long-lived productive assets resulting in a relatively long return period. Moreover, although the profit margin of R&M division is decreasing steadily with a long-term trend...
Words: 3079 - Pages: 13
