Midland Energy Resources, Inc.: Cost of Capital May 28, 2014 1. For what purposes dose Mortensen estimated 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? Estimates of Midland’s cost of capital are used in many analyses, including asset appraisals for both capital budgeting and financial accounting, performance assessments, M&A proposals, and stock
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Financial Management Prof. Joseph Vu 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
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To find the corporate cost of capital for Midland Energy Resources we will need to find the cost of capital of the three divisions within the company. The formula for WACC is: WACC=rd * (D/V) * (1-t) + re * (E/V) where, rd= Cost of debt re= Cost of equity D= Market value of debt E= Market value of equity V= D+E= Value of the company (or division) T= Tax rate To calculate the cost of debt (rd) for each division we will use the data in the case by adding the premium over the US treasury securities
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Midland Energy Resources, Inc.: Cost of Capital Executive Summary Midland Energy Resources, Inc. is a global energy company comprised of three different operations – oil and gas exploration (E&P), refining and marketing (R&M), and petrochemicals. E&P is Midland’s most profitable business, and midland anticipated continued heavy investment in acquisitions of promising properties, in development of its proved undeveloped reserves, and in expanding production. Midland wanted to boost
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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
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Cost of Capital Estimate for Midland Energy Resources, Inc. In the first section of my report, I list out the main models and methods applied to estimate the cost of capital for Midland’s three divisions, general assumptions made and the corresponding justifications. In the second section, Calculations, I not only compute the cost of capital based on the general assumptions previously made, but also discuss specifics of each division and the additional adjustments or assumptions made to justify
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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
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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
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benchmark that a new project has to meet. In the case, Janet Mortensen prepared the annual cost of capital estimates for Midland Energy Resources Inc. and each of its three divisions. Estimates of the cost of capital were used in many analyses within Midland, including asset appraisal for both capital budgeting and financial accounting, performance assessments, M&A proposal, and stock repurchase decisions. No, they were using the formula for WACC to estimate the cost of capital. 2. Assume the
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available on the case, which is 1.25. And Midland chose to use an equity market risk premium(EMRP) of 5.0% after a review of recent research and in consultation with its professional advisors. So, [pic] Using the following formula, we can calculate average asset beta for each comparable companies and the required two divisions: [pic] [pic] is close to zero so the equation becomes: [pic] Then we can get, Jackson Energy,Inc: [pic] Wide Plain Petroleum: [pic] Corsicana Energy Corp: [pic]
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