The weighted average cost of capital WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets2. Risk free rate here would be same as what we used in calculating cost of debt, which is the 10 year U.
So the method is to look for the list of comparable public companies, and to take arithmetic average of the betas. How can we get asset betas for divisions?
We can see that computing different cost of capitals for different divisions would yield different results from computing cost of capital as a whole corporation.
Since the beta is not provided on Exhibit 5, this is possible that this is a new and growing industry and there are too few public comparative companies in this field.
From Table 1, we will see the spread to treasury for the firm is 1. Midland uses the cost of capital to evaluate value of the company and most prospective investments.
This is because the division faced stiff competition and we already knew the margins had declined steadily over the previous 20 years. Comparable companies will usually share the similar industry, business, and financial characteristics with the target4. From Table 2, we will see the yields to maturity for U.
The WACC differ between different divisions because the betas of each division vary and the target capital structure is different for each division. So they will need to invest in more oversea projects to expand the business, invest in more value creating projects, exploit the borrowing capacity and repurchase the stocks if they find the stock is undervalued.
Treasury securities with an appropriate maturity depending on the division. And Midland expected continued growth due to rising demand.
Get Full Essay Get access to this section to get all help you need with your essay and educational issues. Get Access Midland Energy Resource Case Study Essay Sample Midland Energy Resources is a fairly successful global energy company which had been incorporated more than years previously and in had more than 80, employees.
The estimates are used for asset appraisals for capital budgeting and financial accounting, performance assessments; merger and acquisition proposals and stock repurchase decisions. Due to different business nature discussed above, investors are seeking more returns for division which is more risky.
This data is less influenced by individual opinions and views, so I think this would be more accurate. Financial Analysis Cost of Capital: From Table 1, we can see that the debt rating for each division is different.
The capital asset pricing model CAPM is used to determine a theoretically appropriate required rate of return of an asset, given non-diversifiable risk. Janet Mortensen, the senior vice president of project finance for Midland Energy Resources, has been involved in estimating the cost of capital of the company.
Here are the reasons: Midland is a very large enterprise which has three operation divisions with different capital structure. The general idea behind CAPM is that investors need to be compensated in two ways: It is the rate of return that could have been earned by putting the same money into a different investment with equal risk1.
While the capital expenditure is keep increasing from to Exhibit 3shrinking margin is expected. How should comps be selected? Cost of capital is an important component of business valuation work. Risk premiums for these three divisions are different.
She calculated the weighted average cost of capital WACC for the company as a whole, as well as each of its three divisions.
S Treasury bond yield. The earning trend is different for each division. Here we can calculate the cost of equity using the CAPM model. Mortensen and her team used betas published in commercially available databased, according to Exhibit 5, equity beta for Midland is 1.
In order to achieve those goals, a good financial analysis is needed, especially evaluation of cost of capital. I think this indicate that investors are looking for excess returns which should be represent by higher risk premium. S treasury bonds in January Natural Resources and Energy Paper An ecosystem is a connection among living resources, residents, and habitats of an area.
It includes animals, plants, microorganisms, trees, water and people. Everything that lives in that specific ecosystem is reliant on the other elements of that ecological society.
References I. Executive Summary Midland Energy Resources is a global energy company with operations in oil and gas exploration and production(E&P) providing a broad array of products and services to upstream oil and gas customers worldwide including refining and marketing (R&M), natural gas, and petrochemicals.
Midland Energy Resource Case Study Essay Sample. Midland Energy Resources is a fairly successful global energy company which had been incorporated more than years previously and in had more than 80, employees.
It has three main operations, oil and gas exploration and production (E&P), refining and marketing. In the Midland Energy Resources case study we see that it has its operations divided amongst three separate divisions.
All these three divisions have different functions and need a separate discount rate to evaluate its projects. Midland uses its cost of capital for many different ways. 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. Midland Energy Recourses Essay example. Midland Energy Resources, Inc.: Cost of Capital Executive Summary Midland Energy Resources, Inc.
is a global energy company comprised of three different operations – oil and gas exploration (E&P), refining and marketing (R&M), and petrochemicals.Download