Midland Energy Resources, Cost of Capital

internal vital force Resources, Cost of Capital The cheek is about how Janet Mortensen, senior vice electric chair of project finance for interior(a) Energy Resources, prepare her annual damage of roof estimates for internal and each of its iii divisions for her family. inland was a global energy fellowship with operations in oil and petrol exploration and production (E&P), refining and marketing(R&M), and petrochemicals. Estimates of price of capital prepared by Mortensen were employ in many analyses within Midland, including summation appraisals for both capital budgeting and financial accounting, surgical process assessments.Since her calculations had been widely applied in motley areas and became influential, she was considering appending a sort of users guide to the 2007 set of calculations for reference to incompatible applications. Mortensen use WACC formula to estimate woo of capital, number the cost of debt by adding a premium over US exchequer securitie s of a similar maturity, and calculate the cost of equity by development the CAPM formula. subsequently reviewing the case and tables granted, we calculated the companys composite WACC and WACCs for each division respectively. The companys composite WACC is 8. 19%. The inputs we used are counterpane to treasury of 1. 2%, debt ratio of 42. 2%, Treasury sequester yields of 4. 98% at a 30-year maturity, the 2006 tax rate of 39%, beta of 1. 25, and EMRP of 5%. However, we do not think that EMRP given in the case is appropriate. Instead, we recommend 3. 3%, which is the most recent EMRP estimate accord the survey results in the possess 6. Midland johnnot use the same WACC for all divisions. It has common chord different divisions with different risk or Beta, which is given in Exhibit 5. If midland uses same WACC for all division it tidy sum accept risky investment or some time it may take by giving up fat investment.It should use somatic WACC only for corporate level decisi on. WACC for E&P and R&M is calculated by using cost of debt by adding risk turn rate plus spread to TB. From the Exhibit 5, weights for debt and Equity are calculated. WACC of E&P is 8. 82 and R&F is 9. 83. two WACC are different to each other because they have different risk level, leverage and credit rating. Calculation Part WACC (E&P)=rd(D/V)(1-t)+re(E/V)=6. 58*0. 2847(1-0. 39)+10. 73*0. 7153=8. 8178 rd=rf+spread =4. 98+1. 6=6. 58, re=rf+B(EMRP)=4. 98+1. 15*5=10. 73 D/E=0. 398 or V-E/E=0. 398 or E/V=0. 7153D/V=1-E/V=1-0. 7153=0. 2847 WACC (R&M)=rd(D/V)(1-t)+re(E/V)=6. 78*0. 1687(1-0. 39)+10. 98*0. 8313=9. 8253 rd= rf+spread =4. 98+1. 8=6. 78re= rf+B(EMRP)=4. 98+1. 2*5=10. 98 D/E=0. 203orV-E/E=0. 203orE/V=0. 8313, D/V=1-E/V=1-0. 8313=0. 1687 For Petrochemical division, since we dont have sufficient information of that division. We cannot compute our Beta so that we cannot get an occupy number of WACC for the division. If the managers want to have a rough estimate, they can us e the boilersuit Beta as an average for three divisions and calculate the Beta for Petrochemical division. Then they can get the WACC.