An English-language PDF of this Brief Case in an academic course pack will allow the students with the opportunity to buy an audio form as well. The senior vice president, responsible for project financing in an international oil and gas company has to establish the overall weighted average cost of capital for the firm and each of its sub-sections for the yearly budgeting procedure. The case makes use of analogous companies in order to approximate and evaluate the asset betas for each of the functional division and makes use of the Capital Asset Pricing Model for concluding the cost of equity. Students will be made to un-lever and re-lever betas and decide the best risk-free rate, as well as calculate the cost of debt and equity.
Return on Debt,
Yield Spread, Beta,
Return on Equity,
WACC for Midland, Exploration and Production, Refining and Marketing and Petrochemicals.
What should be the cost of capital for Midland operational divisions?
How are Mortensen’s estimates of Midland’s cost of capital used? How, if at all, should these anticipated uses affect the calculations?
Is Midland’s choice of an expected market risk premium for equity appropriate? If not, do you have alternatives you might suggest?
Calculate Midland’s corporate WACC. Be prepared to defend your specific assumptions about the various inputs to the calculations. Is Midland’s choice of EMRP appropriate? If not, what recommendations would you make and why?
Should Midland use a single corporate hurdle rate for evaluating investment opportunities in all of its divisions? Why or why not?
Calculate a separate cost of capital for the E&P and Marketing & Refining divisions.What causes them to differ from one another? Should all of the firm’s shown in Exhibit 5 we used in estimating betas for these two divisions or should some be excluded? If you decide to exclude some, what would be the basis for their exclusion?
The case does not provide comparable company information for petrochemicals division. How should Janet Mortensen develop a divisional WACC might be developed for petrochemicals?