Midland Energy Resources, Cost of Capital

inland Energy Resources, Cost of hood The pillowcase is about how Janet Mortensen, senior ill-doing president of project finance for Midland Energy Resources, prep be her annual bell of roof estimates for midland and each of its cardinal divisions for her company. Midland was a global cipher company with ope proportionalityns in cover and gas exploration and production (E& angstromP), refining and marketing(R&M), and petrochemicals. Estimates of cost of capital prep ard by Mortensen were apply in many analyses within Midland, including asset appraisals for nigh(prenominal) capital bud nameing and financial accounting, performance assessments.Since her calculations had been wide applied in various areas and became influential, she was considering appending a sort of applyrs train to the 2007 set of calculations for reference to different applications. Mortensen mapd WACC formula to estimate cost of capital, enter the cost of debt by adding a bounty over US Treasu ry securities of a similar maturity, and calculate the cost of fairness by using the CAPM formula. After reviewing the case and tables apt(p), we calculated the companys tangled WACC and WACCs for each division respectively. The companys composite WACC is 8. 19%. The inputs we workoutd are scattering to treasury of 1. 2%, debt ratio of 42. 2%, Treasury bond 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 approximately recent EMRP estimate according the bailiwick results in the Exhibit 6. Midland cannot use the said(prenominal) WACC for all divisions. It has three different divisions with different hazard or Beta, which is given in Exhibit 5. If midland uses same WACC for all division it can deal risky investment or some time it may mislead by giving up profitable investment.It should use corporate WACC only for corp orate level decision. WACC for E&P and R&M is calculated by using cost of debt by adding risk free 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. Both WACC are different to each other because they make believe different risk level, leverage and reliance 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 wearyt pass sufficient randomness of that division. We cannot compute our Beta so that we cannot get an exact number of WACC for the division. If the man agers want to have a rough estimate, they can use the overall Beta as an number for three divisions and calculate the Beta for Petrochemical division. then they can get the WACC.