...Midland Energy Resource Report for Cost of Capital October 16, 2014 Abstraction General Analysis of Midland Energy Resources Cost of Debt • • • • Consolidated Company Exploration & Production Refining and Marketing Petrochemicals Cost of Equity Equity market risk premium of 5% is reasonable. According to the Exhibit 6, the U.S. stock return minus Treasury bond yields for each period varies. Since each period has different standard error, it will be better to take the weighted average of the data, then EMRP is approximately 5.9% or lets say 6.0%. Comparing to the EMRP that Midland would use in the calculation of WACC which is 5%, the historical data reflects a higher EMRP. But from the market risk premium survey results, we see that finance professors, CFOs and fund managers advocate a lower rate on risk premium. Because these people have better understanding in the performance of the market and be more aware of how economics works, then the analysis from them should be taken into great consideration. Therefore, 6.0% from the past data balanced with some lower rates that suggested by bankers, auditors as well as Wall Street analysts, 5% should be appropriate. Weighted Average Cost of Capital WACC = λ(1 − t)KD + (1 − λ)KE The Effect of Leverage on the Cost of Equity and WACC Cost of Equity The relation between cost of equity and leverage can be shown as follows: βEquity = 1 βU (1 − λ) Asset Cost of Equity = Risk Free Rate + βEquity × (Risk Premium) We further illustrate...
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...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....
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...To: Janet Mortensen, CFO From: Senior Financial Analyst Division Date: October 7, 2013 Re: Midland Energy Resources Inc. Weighted Average Cost of Capital Midland Energy Resources Inc. is a publicly traded company that primarily deals in the energy industry. The company itself is divided into three major operational divisions, two of which that is concerning to the company include: Oil and Gas Exploration and Production (E&P) and Refining and Marketing (R&M). The Petrochemicals division will not be addressed. Going forward, Midland Energy would like to undertake various development projects and property acquisitions, and the profitability of such endeavors must be evaluated. To do so, both the single corporate and the two division WACCs must be calculated. Management team at Midland Energy Resources Inc. can determine which of the three appropriate WACC figures to be used for future company reports. In order to calculate Midland Energy Resources’ corporate WACC, the calculations are based on the formula below, where ������������ and ������������ are the cost of equity and debt respectively, D and E are the values of debt and equity respectively, V is the company’s enterprise value, and t is the tax rate. WACC estimates for the company as a whole and for each division are summarized in Table 1. How it is arrived at these figures is shown in the calculations in Appendix 1 and the decisions for each variable are explained below. ������ ������ ������������������������ = ������������...
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...Message Our team has performed thorough analysis surrounding the questions of cost of capital for Midland Energy Resources, Inc. (Midland). Here are the results of our research: 1. Ms. Mortensen estimates Midland’s cost of capital for a variety of reasons including use for capital budgeting, financial accounting, performance assessments, stock repurchase estimations, and potential “M&A” opportunities. In addition, Midland relies on the cost of capital to deliver on the financial and investment policies set forth by the Board. Finally, the cost of capital is also used in relation to expected growth and forecasted demand. To explain, if the forecasting department foresees an increase in sales of resources, Ms. Mortensen can use the cost of capital to properly determine if it is financially sound to make an investment in the company to support that demand. Should Ms. Mortensen overestimate the cost of capital for the firm, Midland may miss out on investment opportunities and will under value the investment at hand. Furthermore, it is possible for shareholders to see a lower return on their investment. At the other end, in which the cost of capital is understated, Midland may engage in an investment that is potentially “bad” and will be overvalued. Shareholders will see over inflated returns based on this approach. 2. Based on our calculations, our team has determined that Midland’s firm-wide WACC is 8.48%. Assumptions that our team made can be found starting...
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...Índice Midland Energy Resources, Inc. 3 Exploración y Producción de Hidrocarburos 3 Refinación y Comercialización 3 Petroquímica 3 Problemática del Caso 3 Solución 4 Escenario 1 5 Supuestos: 5 Cálculo: 5 Escenario 2 5 Supuestos: 5 Calculo: 6 Conclusiones y Recomendaciones 6 Midland Energy Resources, Inc. Midland Energy Resources, es una compañía global de energía con operaciones en exploración y producción de petróleo & gas (E&P), refinación y comercialización (R&M) y petroquímica (P). En 2006, la empresa obtuvo ingresos y utilidades operacionales por $248.5 y $42.2 mil millones de dólares. Esta empresa tiene 120 años en el mercado y opera con más de 80,000 empleados. Exploración y Producción de Hidrocarburos Durante 2006, Midland extrajo 2.10 millones de barriles de petróleo por día, lo que representa un incremento del 6.3% con respecto al 2005 y cerca de 7.28 mil millones de pies cúbicos de gas natural por día, con apenas un incremento del 1% con respecto al 2005. Con estos precios en su nivel record, Midland anticipa seguir invirtiendo en propiedades prometedoras para el incremento de su producción. Refinación y Comercialización Midland es propietario de 40 refinerías en el mundo con una capacidad de refinación de 5.0 millones de barriles por día. Sus ingresos en el 2006 fueron de $203.0 mil millones, 1.8% por debajo del 2005 y un resultado, después de impuestos, de $4.0 mil millones. Midland proyectó que la inversión en esta...
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...Question III: Should Midland use a single corporate hurdle rate for evaluating investment opportunities in all of its divisions? Why or why not? It depends on what kind of investment opportunity is proposed. If it is an investment that affects the company as a whole on the corporate level then they should use a corporate rate. If it is an investment that applies only to specific divisions then that division’s hurdle rate should be used. Using a corporate rate for division specific investments may incorrectly evaluate the riskiness of a particular investment. The rates should be calculated and used accordingly. The divisions of Midland Energy Resources, Inc. are a bit diverse and therefore any investment opportunities should be separately evaluated based on the division that will be affected. Question IV: Compute a separate cost of capital for the E&P and Marketing & Refining divisions. What causes them to differ from one another? Exploration & Production rE = rf + β(EMRP) rD = rf + E&P treasury spread rE = 4.98% + 1.15(5%) = 10.73% rD = 4.98% + 1.6% = 6.58% rE = 10.73% rD = 6.58% tax rate = 39% D/E = 39.8% D = 39.8 E = 100 V = D + E = 139.8 D/V = 39.8/139.8 = 0.2847 E/V = 100/139.8 = 0.7153 WACC = rD (D/V)(1-t) + rE (E/V) = .0658(.2847)(1-.39) + .1073(.7153) WACC = 0.08818, 8.818% Refining & Marketing rE = rf + β(EMRP) rD = rf + R&M treasury spread rE = 4.98% + 1.20(5%) = 10.98% rD = 4.98% + 1.80% = 6.78% rE = 10...
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...Midland Energy Resources, Inc.: Cost of Capital Analysis TABLE OF CONTENTS I. EXECUTIVE SUMMARY ........................................................................................ 2 II. COMPONENT ESTIMATIONS ............................................................................... 2 1. Effective Tax Rate - t ............................................................................................. 2 2. Capital Structure – D/E ......................................................................................... 3 3. Cost of Debt - r" .................................................................................................... 3 Exploration & Production (E&P) ................................................................................ 3 Refining and Marketing (R&M).................................................................................. 4 Petrochemicals ......................................................................................................... 4 4. Cost of Equity -r# ................................................................................................... 4 1) r$ ........................................................................................................................ 4 2) βlevered ............................................................................................................. 4 Exploration & Production (E&P) .................................................................
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...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...
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...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...
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...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...
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...MBA: 638 Caselette: Village Volvo 1) Village Volvo has several unique service packages. First of all we can talk about their supporting facility. Village Volvo is located in a suburban location. This might discourage some clients. They should increase the shuttle services for the convenience of their customers. To establish the proper mood Village Volvo has an office, waiting area, storage, and four bays. The facilitating goods provided by the Village Volvo are the replacement auto parts. The owners also had developed a network with other service providers. They refer their clients to other service provider if there is some thing which they can not do. Village Volvo also uses another source of information which that calls Custom Care Vehicle Dossier (CCVD). They maintain a file on every car they inspect. This helps the mechanic to keep a record on the car and also it helps remind the customer that there is a maintenance procedure due on their car. The explicit services are something which is readily observable. The customers know before hand that they are going Village Volvo to get their car repaired. The owners combined experience is 22 years at a local Volvo dealership. Thus, the customers would not be worried that the person working on their car has no experience working on Volvo’s. There are some procedures which they don not perform. For that Village Volvo recommend different places where they can get their cat fixed. Lastly, implicit services which is a psychological...
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...Essay 1 Energy Independence 9/28/2011 Persuasive Writing Charles Mountin Thesis Statement America needs to achieve energy independence and reduce its dependence on foreign oil. Abstract The United States need to lower its dependence on foreign oil. The U.S. dependence on foreign oil has created a huge trade deficit that puts billions of U.S. dollars into the hands of countries that are not U.S. allies. This dependence also could lead to an economic downturn if there is another spike in oil prices. The U.S. needs to find alternatives to foreign oil that are environmentally sound and U.S. made to achieve energy independence. America needs to find new energy sources and better energy conservation to meet its future energy needs. As of now America is far too dependent on foreign oil for its main energy source. Many experts say that the world is at peak output for oil right now and will be decreasing into the future. Right now the world has about 6.7 billion people, but by 2050 the estimate for world population is more than 9 billion people. That means we need a lot more oil than we now produce and our production capacity is already almost at its peak. If are still powering our cars, factories, and homes with oil when oil starts to run out we will be in a lot of trouble. In 2008 when oil supplies were near capacity the price of gas shot up to over $4.00 a gallon and I could barely keep up with my bills because of the extra money spent on gas. The price spike also...
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...according to the sector, in most cases these fears are unwarranted. Sustainable business practices should be evaluated based on a cost/benefit analysis. The benefits for things like brand reputation and employee loyalty, must be weighed against the costs and risks. When considering the value of sustainable practices businesses need to be notified of a wide range of benefits. Human resources are a good example of a department that benefits from greener practices. According to The Harvard Business Review’s summary of a number of green building studies, green facilities have been shown to increase the productivity of employees. Research further reveals that retailers who installed skylights saved energy and boosted sales by as much as 40 percent. Other research has indicated that loyalty and morale are positively impacted by a green workplace. Greening a physical environment contributes to health and reduces sick days. MonsterTRACK.com study revealed that people want to work for a company that is green. These factors enable green companies to attract and retain the best people, while saving human resources time and money. Green initiatives can save money, strengthen employee loyalty, enhance a company’s reputation and increase productivity. (Richard Matthews) Businesses that invest in green initiatives improve their bottom line while businesses that ignore climate change are doomed to incur much greater costs down the road. A cost benefit assessment of many sustainable initiatives...
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...33-59 Pakistan’s Energy Sector Issues: Energy Efficiency and Energy Environmental Links Tariq Husain* Abstract This paper analyzes Pakistan’s energy sector issues and highlights (i) the importance of the link between energy and the environment, and (ii) the central importance of energy efficiency for high return demand-side solutions to meet the country’s energy needs. The paper argues that energy planning should integrate the external cost of energy use in deciding about the composition of supply: coal, oil, gas, hydropower, renewable, nuclear, and solar. By utilizing external cost estimates made by the European Commission for Europe, and the US National Academy of Sciences, a total cost (external + internal) ranking of primary energy sources for Pakistan is estimated. This estimate is at the low end of the cost spectrum because classic pollutants—sulfur dioxide, nitrogen oxides, carbon monoxide—in Pakistan are significantly higher than in Europe or the US. The paper also discusses the experiences of China and OECD countries in increasing energy-wide efficiency. A central lesson emerging from the analysis is that Pakistan will have to significantly increase its energy-related research and development expenditure in order to adequately address its energy sector issues. A quadrupling from 0.25 % of gross domestic product is recommended over a decade. Keywords: Energy, policy, environment, Pakistan. JEL Classification: Q48, Q47, Q5. I. Introduction Energy is the life blood of...
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...Transforming a Brazilian National Champion into the World’s Leading Energy Exploration and Production Company Team 5: Todd Anderson Guy Gresham Gopinath Polavarapu Heraclio Rojas Alina Shastun Who is Petrobras? Background: • • • • Brazil’s national oil company and the largest in Latin America Petrobras accounts for 95% of Brazil’s national oil and gas production Ownership – Government (64%) and Private Sector Market Capitalization – fifth largest publicly traded energy company in the world Current Strategy: • • To be the world's largest oil producer by 2015 Plan to invest US$ 224 billion by 2014 – Drilling Rigs, Supply and Special Vessels, Production Platforms • Social Responsibility: economic, social and environmental improvement in Brazil Brazil’s Growing Role in Tomorrow’s Energy Market Global consumption will see a paradigm shift from developing economies to emerging. Global Energy Consumption 1990-2035 Future energy consumption will be driven by emerging markets (non-OECD) demand: – Emerging economies will consume 38% more energy than Developed (OECD) economies in 2020 and 67% more in 2035 Growing concerns over environmental risks Increased regulatory pressure for more safety and environmental regulation in drilling as well as distribution of oil Oil reserves are focused in geopolitically volatile regions The largest oil discoveries have come from Brazil’s offshore, “pre-salt” basins Pre-salt fields are estimated to hold 100 billion barrels of oil, enough...
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