equity into the CAPM formula. Through this calculation we conclude that the cost of equity is 11.23%. These are the results we obtain: Company’s Beta of Equity = 1.25 | Find Cost of Equity (Ke) by CAPM | Ke @ EMRP of 5% = .0498+1.25(.05) | 0.11230 | The next step Midland needs to take in order to determine its corporate WACC‚ is to find the cost of debt. We can be more confident in the actual future cost of the debt in the future because it is a set amount of interest paid to debt holders
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Midland Energy Resources‚ Inc.: Cost of Capital Situation Analysis Company is trying to estimate cost of capital for each of the three divisions‚ Exploration and Production (E&P)‚ Refining and Marketing (R&M) and Petrochemicals. Cost of capital analysis is used in taking following decisions in the organization: Project appraisal Financial accounting Stock repurchases decisions Merger & Acquisitions Performance assessment The estimates produced by treasury were criticized because of specific
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Midland Energy Introduction: Midland Energy Resources‚ Inc. is a global multi-division energy company with operations in oil and gas exploration and production (E&P)‚ refining and marketing (R&M)‚ and petrochemicals. On a consolidated level‚ the company had 2006 operating revenue and operating income of $248.5 billion and $42.2 billion‚ respectively. Its largest division is R&M with the Petrochemical division being the smallest. Midland’s most profitable segment is its P&E division which generates
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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
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adding the spread to Treasury (1.62%) to the rate of 30-year treasury bonds in 2007. Rd=0.0498+0.0162=0.066 3. Cost of equity‚ the EMRP (5%) and D/E (59.3%) was taken out of the context of the case. βa=Equity Beta/(1+D/E)= 1.25/(1+0.593)= 0.78 According to Table1‚ consolidated D/V is 42.2%‚ E/V is 57.8%‚ βe= βa*(1+D/E)= 0.78*(1+0.422/0.578)=1.35 Re=Rf+ βe *EMRP= 0.0498+(1.35*0.05)= 0.1173 4. WACC‚ the tax rate (38.58%) was from the 2006 taxes paid. WACC= D/V*(1-T)*Rd+E/V*Re= 0.422*(1-0
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Midland Energy Resources 1. For what purposes does Mortensen estimate Midland’s cost of capital? What would be the potential consequences of a too high estimate compared to the firm’s “true” cost of capital? What about a too low estimate? Estimates of the cost of capital were used in many analyses within Midland‚ including asset appraisals for both capital budgeting and financial accounting‚ performance assessments‚ M&A proposals‚ and stock repurchase decisions. Moreover‚ depending
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Answer Case Study 2 Midland Energy Resources (as a whole company) According to the article‚ the beta of Midland Energy is 1.25. beta=1.25 cost of equity re = rf + beta * (EMRPs) EMRPs = 5.0% We assume that the company will run for next 30years‚ so the rate of risk free is 4.98% rf = 4.98% Cost of Equity: rE = rf + beta * (EMRPs) = 4.98% + 1.25 * 5% = 11.23% Market Value of Equity = $134114m (Exhibit 5) Cost of Debt 30years‚ rD = rf + spread to treasury = 4.98% + 1.62% = 6.60% Market
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Professor Smith Midland Energy Resources‚ Inc.: Cost of Capital Case Questions This case provides an opportunity to determine what cost of capital firms should use when firms are evaluating investment opportunities. The case addresses what inputs should be used in estimating the opportunity cost of capital for investors as well as which firms should be identified as comparables. 1. How are Mortensen’s estimates of Midland’s cost of capital used? How‚ if at all‚ should these anticipated uses
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Midland Chemical Assignment Midland Chemical Co. is negotiating a loan from Manhattan Bank and Trust. The small chemical company needs to borrow $500‚000. The bank offers a rate of 8 ¼ percent with a 20 percent compensating balance requirement‚ or as an alternative‚ 9 ¾ percent with additional fees of $5‚500 to cover services the bank is providing. In either case the rate on the loan is floating (changes as the prime interest rate changes). The loan would be for one year. a. Which loan carries
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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
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