# Midland Energy Resources, Inc.: Cost of Capital

Pages: 8 (1821 words) Published: October 22, 2014

ESE
540

Case
Study
1:
Midland
Energy
Resources,
Inc.:
Cost
of
Capital

Team
S

As
a
profitable
company
that
has
been
incorporated
more
than
120
years
and
with

more
than
80,000
employees,
Midland
Energy
Resources
provides
a
wide
range
of

operation
and
services,
which
can
be
concluded
with
three
major
divisions:

Exploration
&
Production,
Refining
and
Marketing
and
Petrochemicals.
Janet

Mortensen,
the
senior
vice
president
of
project
finance
for
the
company,
has
been

to
calculate
the
WACC
of
the
company,
including
the
company’s
three

divisions
as
part
of
the
annual
assessment
of
Midland’s
financial
condition.
Given
the

exhibits
of
all
relevant
financial
information,
accurate
calculations
can
be
done
by

choosing
appropriate
data.

As
mentioned
in
the
document,
Midland
Energy
Resources
been
incorporated

more
than
120
years
previously.
In
order
to
do
the
calculation
of
cost
of
debt
and

cost
of
equity
for
such
a
historical
company,
1-­‐year
or
even
10-­‐year
risk-­‐free
rate

values
are
not
accurate
enough.
The
risk-­‐free
rate
with
the
longest
period
should
be

suitable
for
this
situation.
Thus
the
value
4.98%
(30-­‐year)
should
be
used.

Due
to
the
document,
the
cost
of
debt
for
each
division
can
be
calculated
by
a

or
over
U.S.
Treasury
securities
of
a
similar
maturity:

rd
(Midland):
4.98%
+1.62%
=
6.60%

rd
(Exploration
&
Production):
4.98%
+1.60%
=
6.58%

rd
(Refining
&
Marketing):
4.98%
+1.80%
=
6.78%

rd
(Petrochemicals):
4.98%
+1.35%
=
6.33
%

Considering
the
credit
rating:
The
higher
the
credit
rate
is,
the
lower
the

to
treasury
is.
As
the
credit
ratings
of
the
three
divisions
are
different,
the

to
treasury
value
would
be
different.
Thus
the
costs
of
debt
are
different.

1

Considering
the
nature
of
the
divisions’
operations:
The
to
treasury

depends
on
the
factors
such
as
division’s