Midland Energy Resource Inc
Midland Energy Resources, Inc.
Executive Summary
Midland Energy Resources was fortunate enough to have a skilled financial manager in Mortensen. Her expertise had come to be respected as was evidenced by her promotion and the reliance on her calculations. However, her cost of equity numbers were used as a starting point and manipulated rather than used as presented. Examining the calculation of the firms weighted average cost of capital and betas as well as comparing with others in the same type of industries indicates that assumptions should be changed for the project being analyzed. Consideration of debt, equity, and costs must be given for the specific project while being mindful of company strategy. Although projects may be evaluated differently, company directives should be followed. Midland Energy Resources was fortunate enough to have a skilled financial manager in Mortensen. Her expertise had come to be respected as was evidenced by her promotion and the reliance on her calculations. However, her cost of equity numbers were used as a starting point and manipulated rather than used as presented.Midland utilizes a four prong approach to financial and investment policies.
Deviation from strategy is not surprising given the volatility in production, pricing, and politics in overseas markets. When analyzing the proceeds from overseas projects,Midland converted proceeds to US dollars and used discount rates in US dollars instead of analyzing in the appropriate currency and converting the discount rate to the appropriate currency. Whether or not the project actually produced the earnings as evaluated is questionable.
Under the value-creating investment prong,some projects were considered as future equity cash flows using the cost of equity as the discount rate instead of the hurdle rate based on the project or divisional WACC. The calculation of EVA (economic value added) was manipulated by a “capital charge” and the “capital charge” was
Executive Summary
Midland Energy Resources was fortunate enough to have a skilled financial manager in Mortensen. Her expertise had come to be respected as was evidenced by her promotion and the reliance on her calculations. However, her cost of equity numbers were used as a starting point and manipulated rather than used as presented. Examining the calculation of the firms weighted average cost of capital and betas as well as comparing with others in the same type of industries indicates that assumptions should be changed for the project being analyzed. Consideration of debt, equity, and costs must be given for the specific project while being mindful of company strategy. Although projects may be evaluated differently, company directives should be followed. Midland Energy Resources was fortunate enough to have a skilled financial manager in Mortensen. Her expertise had come to be respected as was evidenced by her promotion and the reliance on her calculations. However, her cost of equity numbers were used as a starting point and manipulated rather than used as presented.Midland utilizes a four prong approach to financial and investment policies.
Deviation from strategy is not surprising given the volatility in production, pricing, and politics in overseas markets. When analyzing the proceeds from overseas projects,Midland converted proceeds to US dollars and used discount rates in US dollars instead of analyzing in the appropriate currency and converting the discount rate to the appropriate currency. Whether or not the project actually produced the earnings as evaluated is questionable.
Under the value-creating investment prong,some projects were considered as future equity cash flows using the cost of equity as the discount rate instead of the hurdle rate based on the project or divisional WACC. The calculation of EVA (economic value added) was manipulated by a “capital charge” and the “capital charge” was