Financial Analysis of Pioneer Petroleum Corporation
This paper aims to analyze the case of Pioneer Petroleum Corporation. It will analyze the financial summary of Pioneer from 1983 to 1990 as well as the U.S. capital markets from 1980 to 1990. It will present correct calculations of the overall corporate weighted average cost of capital, and will discuss the constant growth dividend valuation model and capital asset pricing model. This paper will choose either the single corporate cost of capital or multiple divisional hurdle rates in evaluating projects and allocating investment funds among divisions. It will also discuss the discount rate for environmental projects. Finally, it will analyze the strengths, weaknesses, opportunities, and risks of Pioneer. Financial Analysis of Pioneer Petroleum Corporation
Introduction of Pioneer
The Pioneer Petroleum Corporation (hereinafter referred to as Pioneer) was “formed in 1924 with the merger of several formerly independent firms operating in the oil refining, pipeline transportation, and industrial chemical fields” (Ruback, 1991, p. 1). Pioneer was restructured in 1985, and after that it was a hydrocarbons-based company which was focused on oil, gas, coal and petrochemicals (Ruback, 1991). By improving operation for many years, Pioneer had been involved in multiple industries, including exploration and production of crude oil, marketing refined petroleum products, plastics, agricultural chemicals, and real-estate development (Ruback, 1991). In addition, Pioneer was one of the refiners that had the lowest cost on the West Coast of the United States. It had an “extensive West Coast marketing network” (Ruback, 1991). Pioneer had put additional investment on its sulfur recovery facility and the improvement of a coker to increase the efficiency of refineries. Pioneer had tried its best to avoid pollution, and it had paid much attention to its environmental projects. Statement of Problems
In 1991, the determinant of a minimum acceptable rate of return on new capital investments became a vital issue for managers and the board of Pioneer (Ruback, 1991). Pioneer stated two kinds of approaches to determine the minimum acceptable rate of return: a single corporate cost of capital and multiple divisional hurdle rates. Managers needed to make a decision about the existing operation and investment based on the minimum acceptable rate, so that determining which rate should be used is of great importance. Since Pioneer’s “basic capital budgeting approach was to accept all proposed investments with a positive net present value when discounted at the appropriate cost of capital,” it is essential for it to choose a correct discount rate (Ruback, 1991, p. 1). Pioneer should also calculate its weighted average cost of capital (WACC) correctly. U.S. Capital Markets Analysis
Information on U.S. Capital Markets, 1980-1990
Yields on newly issued As industrials (%)
91-day T-bills (%)
Realized returns on S&P 500 index (%) of common stocks
Note: Pioneer Petroleum, by R. S. Ruback, 1991, p. 5.
According to Figure 1, the percentage of yields on newly issued As industrials decreased from 1980 to 1981, which were 11.8% and 14.0%, respectively. Then it decreased from 1981 to 1990, which was 9.4% in 1990. The percentage of 91-day T-bills decreased from 11.2% to 7.8% between 1980 and 1990 unsteadily. The highest portion of 91-day T-bills appeared in the year 1981, which was 14.7%. The changes of percentages of the realized returns on S&P 500 index of common stocks between 1980 and 1990 are not unified. The highest and lowest percentages of it were in...
References: Block, S. B., Hirt, G. A., & Danielsen, B. R. (2011). Foundations of financial management (14th ed.). New York: McGraw-Hill/Irwin.
Ruback, R. S. (1991). Pioneer Petroleum. Harvard Business School, Boson, MA 02163.
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