Midland Energy
Please prepare a 2-3 pages of case memo addressing the following issues. Please include the Excel sheets to support your answers.
1. How are Mortensen’s estimates of Midland’s cost of capital used? How, if at all, should these anticipated uses affect the calculations? Janet Mortensen, Senior Vice President of project finance for Midland Energy Resources has calculated yearly annual cost of capital investments for Midland and each of its three divisions. The three divisions consist of oil and gas Exploration and Production (E&P), Refining and Marketing (R&M) and Petrochemicals. E&P is Midland’s most profitable business unit producing 2.10 million barrels of oil and 7.28 billion cubic feet of natural gas per day, bringing total earnings after taxes of 12.6 billion. R&M brought Midland’s its highest operating revenue of $202.1 billion but an earnings after tax of $4.0 billion. R&M has ownership interest of forty refineries around the world that produces gasoline for fuel to automobiles. Lastly, Petrochemical’s was Midland’s smallest division with 25 equity interests in manufacturing facilities and five research centers in eight countries around the world, bringing a earnings after taxes of $2.1 billion.
These estimates have helped Midland in various analyses such as asset appraisal for capital budgeting and financial accounting, performance assessments, Merger and Acquisitions proposals and stock repurchase decisions. The analysis is used to make decisions at the division and corporate level and have an impact in calculating the Weighted Average Cost of Capital (WACC).
2. Calculate Midland’s corporate WACC. Be prepared to defend your specific assumptions about the various inputs to the calculations (risk-free rate, equity market risk premium (EMRP), beta). Is Midland’s choice of EMRP appropriate? If not, what recommendations would you make and why?
Calculating Midland’s Corporate WACC rd = Cost of debt re = Cost of equity
D =
1. How are Mortensen’s estimates of Midland’s cost of capital used? How, if at all, should these anticipated uses affect the calculations? Janet Mortensen, Senior Vice President of project finance for Midland Energy Resources has calculated yearly annual cost of capital investments for Midland and each of its three divisions. The three divisions consist of oil and gas Exploration and Production (E&P), Refining and Marketing (R&M) and Petrochemicals. E&P is Midland’s most profitable business unit producing 2.10 million barrels of oil and 7.28 billion cubic feet of natural gas per day, bringing total earnings after taxes of 12.6 billion. R&M brought Midland’s its highest operating revenue of $202.1 billion but an earnings after tax of $4.0 billion. R&M has ownership interest of forty refineries around the world that produces gasoline for fuel to automobiles. Lastly, Petrochemical’s was Midland’s smallest division with 25 equity interests in manufacturing facilities and five research centers in eight countries around the world, bringing a earnings after taxes of $2.1 billion.
These estimates have helped Midland in various analyses such as asset appraisal for capital budgeting and financial accounting, performance assessments, Merger and Acquisitions proposals and stock repurchase decisions. The analysis is used to make decisions at the division and corporate level and have an impact in calculating the Weighted Average Cost of Capital (WACC).
2. Calculate Midland’s corporate WACC. Be prepared to defend your specific assumptions about the various inputs to the calculations (risk-free rate, equity market risk premium (EMRP), beta). Is Midland’s choice of EMRP appropriate? If not, what recommendations would you make and why?
Calculating Midland’s Corporate WACC rd = Cost of debt re = Cost of equity
D =