Midland Energy Resources

Topics: Stock market, Stock, Weighted average cost of capital Pages: 4 (1421 words) Published: April 4, 2013
1.) How does Midland determine that shares are undervalues? Midland Energy Resources determine that the shares are undervalued with a comparing from the intrinsic value of the shares and the actual stock price. The intrinsic value can be computed with the fundamental value of the enterprise minus the market value of debts divided per the number of shares outstanding. For calculate the fundamental value of the enterprise, Midland Energy Resources has to sum up all discounted future net cash flows of the firm. The discount factor can be calculated with the WACC formula. (The calculation of the WACC formula is done in question 3) In this case we would choose a time horizon from 10 years, regarding to the data quality and the uncertainty of the evolution of Midland Energy Resources future cash flows. In addition the time horizon of the cash flow estimation should be equal to the used maturity of the risk free rate in the WACC calculation. Midland Energy Resources will repurchase shares if the calculation explained above shows that the intrinsic value per share is higher than the actual stock price. It’s important that the comparison is done at the same date. 2.) Shares can be repurchased in the open market or with a repurchase offer. As a shareholder of Midland, would you prefer that Midland uses the open market or the repurchase offer method to buy back its shares? Why? If the company is repurchasing the shares in the open market, shareholders just receive the market price. For this reason it doesn’t matter for the shareholders either the midland energy repurchase a part of their own shares or another investor is buying the shares. Obviously the stock price could increase a little bit because of the higher demand for the Midland Energy stocks. Nevertheless a share repurchase offer is more advantageously for a shareholder who is willing to sell his shares because he receives a premium compared to the market price from the stocks. Mainly there are two possibilities...
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