The Problem:
Pioneer Petroleum Corporation (PPC) has two major problems that are interfering with the goal of the firm to maximize shareholder wealth. The first is that PPC has been calculating their weighted average cost of capital incorrectly, by incorrectly calculating their after tax cost of debt and their cost of equity. This miscalculation has subjected PPC to more risk and has hurt the company’s ability to make appropriate investment decisions. This has also led PPC to accepting investment decisions that should not have been included within their acceptable range. Second, PPC has been using a single company-wide rate for their multi-divisional company. In either instance the company is not maximizing wealth.

Statement of Facts and Assumptions:
PPC has been calculating their after tax cost of debt using the coupon rate of 12% instead of the actual interest rate which is 8%. Taking the 8% interest rate into account, PPC’s actual cost of capital would be calculated as: [.08(1-.34)]= 5.28%. PPC has simply been using 10% (their equity growth rate) as their cost, but must instead either use the CAPM model to calculate their cost of equity, or the Dividend-growth model. If they use the CAPM model, which is the most accurate, their cost of equity will be: .078+.8(.1625-.078)=14.56%. Or they can use the Dividend-growth model and their cost of equity would be: (2.7/63)+.1=14.29%. Both are acceptable but, because the Dividend-growth model is subjective, and the coupon rate (that PPC was originally using is a sunk cost, they should use the market rate). Thus using the market rate to calculate CAPM you use the Beta and market risk premium which are both based on the market rate and more accurate. Finally, their company WACC of 9% that they have calculated is incorrect and given the above calculations, their WACC using CAPM would be: [5.28(.5)+14.6(.5)]=9.94% and their WACC using Dividend-growth would be:...

...CasePioneerPetroleum
This case discusses the calculation of hurdle rates and the use of single vs. multiple hurdle rates.
1. You are tasked with calculating the required rate of return for Pioneer’s investments. Start
with the CAPM.
a. What is the average excess return on the market portfolio over 1980-1990?
b. What are the disadvantages of using historic returns to calculate the CAPM? Give at least
two reasons why expected returns may...

...PioneerPetroleum is a multinational corporation that is in position to capitalize on investments all around the World. Within the industry Pioneer’s gasoline are among the cleanest burning fuels. They are better position than most to meet strict environmental guidelines as they currently have clean efficient running plants positioned to capitalize on less polluted products. Also PioneerPetroleum is heavily involved in exploration...

...Application of Capital Structure, Costs of Capital for Multiple Division firms
CaseAnalysis: PioneerPetroleum Corporation (PPC).1
Submitted by: Joseph Donato N. Pangilinan, FICD
Date Presented: April 12, 2012
Introduction:
This landmark case seeks to break the risk-reward trade off involved in calculating Capital Cost. The object of the solution must be to minimize project risks while maximizing project...

...TO: VEFA TARHAN, SPECIAL TOPICS IN FINANCE
FROM: MAHMUT MACIT, AHMET ARDA ATIK, CAN KORKMAZ
DATE: NOVEMBER 4, 2014
CASE: PIONEERPETROLEUM CORPORATION
Overview of the Company
PioneerPetroleum Corporation established in 1924 and operating in oil refining, pipeline transportation, and industrial chemical fields. Company uses weighted-average cost of capital (WACC) as a discount rate to discount future cash flows that...

...
INTRODUCTION
Background
PioneerPetroleum was founded in 1924, through a merger within industrial, pipeline transportation, and refining fields. PP has evolved over the last 60 years into a company that now also works with agricultural chemicals, plastics, and real estate development concentrating in gas, oil, petrochemicals, and coal. In 1990, PP improved their coker and sulfur recovery facility to make their refining process more efficient and in turn has...

...PioneerPetroleum Corporation's (PPC) has been through a diverse amount of changes throughout the years. They were originally were a merger of several different independent firms operating in the oil refining, pipeline transportation, and industrial chemicals fields. PPC then integrated vertically into exploration and production of crude oil and marketing refined petroleum products, but horizontally into plastics, agricultural chemicals, and real...

...Average Cost of Capital (WACC):
Assumptions:
WACC: as constant debt ratio is the underlying assumption to derive the WACC model, constant debt ratio should be reasonably assumed to be applied by Midland and its three divisions. According to the case, Midland optimizes its debt levels by regularly reevaluations against its energy price and stock price level and each division has its own target debt ratio. Although the actual capital structure sometimes deviates from the...

...NIKE ANALYSIS
The Weight Average Cost of Capital (WACC) is the firm’s cost of capital. We can think of WACC as an average representing the expected return on all of the companies’ securities. It is an extremely important number for both corporations and usually financials advisors. Corporations use this number as a minimum for evaluating their capital projects or investments. So if for example the WACC of a firm is 10% and the return on investing in a project is 4.5%, then...

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