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A Look at Cost of Capital Decisions at Exxon Mobile

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A Look at Cost of Capital Decisions at Exxon Mobile

American Military University
Abstract
This paper discusses and analyses the cost of capital decisions Exxon Mobile faces after its acquisition of XTO Energy. The advantages and disadvantages of both single company – wide cost of capital and divisional costs of capital are detailed. Finally, the method of estimating the costs of capital and determining how Exxon Mobile could best evaluate the weights to use for various sources of capital is discussed.
A Look at Cost of Capital Decisions at Exxon Mobile
Due to its recent acquisition of XTO Energy, Exxon Mobile must reevaluate how it determines the proper cost of capital for use in making corporate investments across the company’s many business units. Essentially, Exxon Mobile has two choices, it can either use a single company – wide cost of capital for analyzing capital expenditures or it can evaluate the divisional costs of capital. Both of these two methods offer their own advantages and disadvantages in analyzing capital expenditures, however the divisional weighted average cost of capital is the best choice for Exxon Mobile due to its recent acquisition of XTO energy.
The consequences of Exxon Mobile using a company - wide cost of capital are that is could lead to the overinvestment or underinvestment into divisions where the beta varies widely from the company beta (Hung Il, 2008). Companies such as Exxon Mobile have many different divisions that are separated either geographically or by division (Keown, Martin & Petty, 2014). The acquisition of XTO Energy represents the entry of Exxon Mobile into the domestic unconventional natural gas resources field, which amounts to another division in the already massive corporation of Exxon Mobile. The projects that XTO Energy undertake would be considered more risky than is typical for Exxon Mobile which, when

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