# Weighted Average Cost of Capital and Midland Energy

**Topics:**Weighted average cost of capital, Finance, Capital

**Pages:**7 (1750 words)

**Published:**April 22, 2013

[Midland Energy Case Analysis] Managerial Finance

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In order to find the cost of capital for Midland Energy Resources and each of the three divisions within the company, we will need to use the formula for weighted average cost of capital (WACC) which is: ( )( 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 First, we can calculate “rd” for each division as it is outlined in the case by adding a premium/spread over US Treasury securities of a similar maturity. In other words: ( The two tables in the case are as follows: Table 1 Business Segment Consolidated E&P R&M Petrochemicals Credit Rating A+ A+ BBB AATable 2 Maturity 1-Year 10-Year 30-Year Rate 4.54% 4.66% 4.98% Debt/Value 42.2% 46.0% 31.0% 40.0% Spread to Treasury 1.62% 1.60% 1.80% 1.35% ) ) ( )

*For my calculation, I used the 30-year maturity for E&P, R&M, and Midland as a whole as they take on longer term projects. I used the 1-year for petrochemicals as they tend to take on short term projects.

[Midland Energy Case Analysis] Managerial Finance

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Calculations are as follows: rd for Exploration & Production:

rd for Refining & Marketing:

rd for Petrochemicals:

rd for Midland:

Second, we need to calculate “re” for the three divisions as well as Midland as a whole. To find “re”, we will use the CAPM model outlined in the case: ( )

In order to solve this equation, we need to find beta for the three divisions. The case already outlines Midland’s overall beta at 1.25. However, the case does not state the beta for the three divisions. We can calculate this using beta for publicly traded companied outlined in the case. Using the following formula, as well as exhibit 5 in the case, we can calculate beta for the three divisions:

*

(

) ( )+

[Midland Energy Case Analysis] Managerial Finance

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Exhibit 5(from case)

Exploration & Production: Jackson Energy, Inc. Wide Plain Petroleum Corsicana...

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