Finance and North American Oil

Pages: 2 (357 words) Published: May 20, 2011
DEFINITION:
The required return necessary to make a capital budgeting project, such as building a new factory, worthwhile. Cost of capital includes the cost of debt and the cost of equity. SUMMARY
EnCana Corporation is a natural gas and oil producer, with involvement in the Alberta Oil Sands. The company was formed though the integration of two large North American oil and gas explorers and producers, Alberta Energy Company Ltd. and Pan Canadian Energy Corporation. Two managers attending a week-long executive education course are working on an assignment which requires them to estimate the cost of capital for EnCana Corporation, a leading North American oil and gas producer. The two managers disagree about which costs need to be taken into account to complete the assignment. They are not sure about the costs of different sources of capital, the overall cost of capital and the appropriate use of the hurdle rate.

COST OF CAPITAL

Equity = No of Share X Stock Price
= 8549 X 56.75
= 4815.575

Capital Stock = Total Debt / Total Capital + Equity / Total Capital = 8054 / 56596.575 + 48515.575 / 56596.575
= 0.1423 + 0.8577
= 1

Cost Of Debt
Publically traded long term debt, other long term debt, deffered tax liability and banker acceptances and commercial papers are cost of debt. Here we will take average of both long term debt and short term debt.
We will be counting the cost of debt after tax because interest expenses are tax exempted. •We took short term debt & long term debt both because short term is ever needed and long term is required •

WEIGHTED AVERAGE COST OF CAPITAL (WACC)
Calculation of Wd:
8.125+7.20+7.37+6.5=29.4
29.4/4=7.3

SHORT TERM DEBTS:
1425/8054 (5.25+3.67/2)
1425/8054 (8.92/2)
1425/8054 (4.46)
0.789

LONG TERM DEBTS:
6629/8054 (7.3)
0.82(7.3)
6.0084
Wd= 6.0084+0.789
Wd=6.7974
WACC = Wd Rd (1- T) + We Re
= (0.71) (6.7974) (1-0.308) + (0.47) (16.519)
=...

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