...Midland Energy Resource Report for Cost of Capital October 16, 2014 Abstraction General Analysis of Midland Energy Resources Cost of Debt • • • • Consolidated Company Exploration & Production Refining and Marketing Petrochemicals Cost of Equity Equity market risk premium of 5% is reasonable. According to the Exhibit 6, the U.S. stock return minus Treasury bond yields for each period varies. Since each period has different standard error, it will be better to take the weighted average of the data, then EMRP is approximately 5.9% or lets say 6.0%. Comparing to the EMRP that Midland would use in the calculation of WACC which is 5%, the historical data reflects a higher EMRP. But from the market risk premium survey results, we see that finance professors, CFOs and fund managers advocate a lower rate on risk premium. Because these people have better understanding in the performance of the market and be more aware of how economics works, then the analysis from them should be taken into great consideration. Therefore, 6.0% from the past data balanced with some lower rates that suggested by bankers, auditors as well as Wall Street analysts, 5% should be appropriate. Weighted Average Cost of Capital WACC = λ(1 − t)KD + (1 − λ)KE The Effect of Leverage on the Cost of Equity and WACC Cost of Equity The relation between cost of equity and leverage can be shown as follows: βEquity = 1 βU (1 − λ) Asset Cost of Equity = Risk Free Rate + βEquity × (Risk Premium) We further illustrate...
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...Executive Summary Midland Energy Resources is a leading global energy developer dedicated to providing advanced power systems and energy services around the world. Midland Energy Resources has three divisions Exploration & Production, Refining & Marketing, and Petrochemicals. They have been incorporated more than 120 years previously and they have 80,000 employees in 2007. Janet Mortensen, the senior vice president of project finance for Midland Energy Resources must determine the weighted average cost of capital (WACC) for the company as a whole and each of its divisions as part of the annual capital budgeting process. As each division has different functions and risk associations, the company needs separate discount rate to evaluate its projects. This report is prepared to find out the realistic measures for assessing cost of capital for Midland Energy Resources. After careful evaluation of available information and using finance literature and relevant course lectures, the analysis is prepared to offer appropriate recommendations for Midland Energy Resources to make future capital budgeting decisions. Company Overview 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. Exploration & Production business, including oil and natural gas exploration and...
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...Executive Summary: Midland Energy Resources, Inc. is a global energy company with a broad array of products and services. The company operates within three different operations including oil and gas exploration and production (E&P), refining and marketing (R&M), and petrochemicals. Midland has proven to be a very profitable company, with reported operating revenue of $248.5 billion and operating income of $42.2 billion. The company has been in business for over 120 years and employed more than 80,000 individuals. Janet Mortensen, the senior vice president of project finance for Midland Energy Resources, has been asked to calculate the weighted average cost of capital (WACC) for the company as a whole, as well as each of its three divisions as part of an annual budgeting process. Midland’s Three Divisions: Exploration & Production Oil exploration and production (E&P) is Midland’s most profitable business, and its net margin over the previous five years was among the highest in the industry. With oil prices at historic highs in early 2007, Midland anticipated heavy investment in acquisitions of promising properties, in development of its proved undeveloped reserves, and in expanding production. They also needed to account for competition from areas such as the Middle East, Central Asia, Russia, and West Africa. Refining and Marketing Midland had ownership interests in forty refineries around the world with distillation capacity of five million barrels a day....
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...Message Our team has performed thorough analysis surrounding the questions of cost of capital for Midland Energy Resources, Inc. (Midland). Here are the results of our research: 1. Ms. Mortensen estimates Midland’s cost of capital for a variety of reasons including use for capital budgeting, financial accounting, performance assessments, stock repurchase estimations, and potential “M&A” opportunities. In addition, Midland relies on the cost of capital to deliver on the financial and investment policies set forth by the Board. Finally, the cost of capital is also used in relation to expected growth and forecasted demand. To explain, if the forecasting department foresees an increase in sales of resources, Ms. Mortensen can use the cost of capital to properly determine if it is financially sound to make an investment in the company to support that demand. Should Ms. Mortensen overestimate the cost of capital for the firm, Midland may miss out on investment opportunities and will under value the investment at hand. Furthermore, it is possible for shareholders to see a lower return on their investment. At the other end, in which the cost of capital is understated, Midland may engage in an investment that is potentially “bad” and will be overvalued. Shareholders will see over inflated returns based on this approach. 2. Based on our calculations, our team has determined that Midland’s firm-wide WACC is 8.48%. Assumptions that our team made can be found starting...
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...Índice Midland Energy Resources, Inc. 3 Exploración y Producción de Hidrocarburos 3 Refinación y Comercialización 3 Petroquímica 3 Problemática del Caso 3 Solución 4 Escenario 1 5 Supuestos: 5 Cálculo: 5 Escenario 2 5 Supuestos: 5 Calculo: 6 Conclusiones y Recomendaciones 6 Midland Energy Resources, Inc. Midland Energy Resources, es una compañía global de energía con operaciones en exploración y producción de petróleo & gas (E&P), refinación y comercialización (R&M) y petroquímica (P). En 2006, la empresa obtuvo ingresos y utilidades operacionales por $248.5 y $42.2 mil millones de dólares. Esta empresa tiene 120 años en el mercado y opera con más de 80,000 empleados. Exploración y Producción de Hidrocarburos Durante 2006, Midland extrajo 2.10 millones de barriles de petróleo por día, lo que representa un incremento del 6.3% con respecto al 2005 y cerca de 7.28 mil millones de pies cúbicos de gas natural por día, con apenas un incremento del 1% con respecto al 2005. Con estos precios en su nivel record, Midland anticipa seguir invirtiendo en propiedades prometedoras para el incremento de su producción. Refinación y Comercialización Midland es propietario de 40 refinerías en el mundo con una capacidad de refinación de 5.0 millones de barriles por día. Sus ingresos en el 2006 fueron de $203.0 mil millones, 1.8% por debajo del 2005 y un resultado, después de impuestos, de $4.0 mil millones. Midland proyectó que la inversión en esta...
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...Question III: Should Midland use a single corporate hurdle rate for evaluating investment opportunities in all of its divisions? Why or why not? It depends on what kind of investment opportunity is proposed. If it is an investment that affects the company as a whole on the corporate level then they should use a corporate rate. If it is an investment that applies only to specific divisions then that division’s hurdle rate should be used. Using a corporate rate for division specific investments may incorrectly evaluate the riskiness of a particular investment. The rates should be calculated and used accordingly. The divisions of Midland Energy Resources, Inc. are a bit diverse and therefore any investment opportunities should be separately evaluated based on the division that will be affected. Question IV: Compute a separate cost of capital for the E&P and Marketing & Refining divisions. What causes them to differ from one another? Exploration & Production rE = rf + β(EMRP) rD = rf + E&P treasury spread rE = 4.98% + 1.15(5%) = 10.73% rD = 4.98% + 1.6% = 6.58% rE = 10.73% rD = 6.58% tax rate = 39% D/E = 39.8% D = 39.8 E = 100 V = D + E = 139.8 D/V = 39.8/139.8 = 0.2847 E/V = 100/139.8 = 0.7153 WACC = rD (D/V)(1-t) + rE (E/V) = .0658(.2847)(1-.39) + .1073(.7153) WACC = 0.08818, 8.818% Refining & Marketing rE = rf + β(EMRP) rD = rf + R&M treasury spread rE = 4.98% + 1.20(5%) = 10.98% rD = 4.98% + 1.80% = 6.78% rE = 10...
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...Midland Energy Resources, Inc.: Cost of Capital Analysis TABLE OF CONTENTS I. EXECUTIVE SUMMARY ........................................................................................ 2 II. COMPONENT ESTIMATIONS ............................................................................... 2 1. Effective Tax Rate - t ............................................................................................. 2 2. Capital Structure – D/E ......................................................................................... 3 3. Cost of Debt - r" .................................................................................................... 3 Exploration & Production (E&P) ................................................................................ 3 Refining and Marketing (R&M).................................................................................. 4 Petrochemicals ......................................................................................................... 4 4. Cost of Equity -r# ................................................................................................... 4 1) r$ ........................................................................................................................ 4 2) βlevered ............................................................................................................. 4 Exploration & Production (E&P) .................................................................
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...BRIEF INFORMATION ABOUT MIDLAND ENERGY RESOURCES Midland Energy Resources was a global energy company with operations in oil and gas exploration and production (E&P), refining and marketing (R&M), and petrochemicals. It had been incorporated more than 120 years and had more than 80,000 employees in 2007. Its consolidated operating revenue, operating income and total assets were $248.5 billion, $42.2 billion and $262.4 billion respectively in 2006. Midland’s E&P division operated in all parts of exploration, development, and production of which production was the dominant operation according to operating results reported in 2006. Also E&P is the most profitable division of Midland. On the other hand, R&M is the largest division in terms of revenue. Midland had ownership interests in 40 refineries all over the world. In the field of this division, there was stiff competition. Midland’s technology is advanced and with the vertical integration it makes Midland market leader in this business. The smallest division of Midland is petrochemicals. Midland’s financial and investment strategies for 2007 was built on four pillars, which are to fund overseas growth, to invest in value-creating project across all divisions, to optimize its capital structure, and to repurchase undervalued shares. Midland used estimates of cost of capitals in many analyses such as asset appraisals for both capital budgeting and financial accounting, performance assessments, M&A proposals, and stock repurchase...
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...Midland Energy Resource Case Analysis I. Midland’s capital planning model and Janet Mortensen's role. The capital-planning model adopted by Midland is MACC, standing for weighted average cost of capital. The primary role of Janet Mortensen is frequently calculating corporate and divisional costs of capital at division level as well as corporate level. In addition, she also needs to check the appropriateness of her calculation and append “user`s guide” to it. Evaluating M&A proposals, stock repurchase decision, and performance assessment. II. Brief Explanation: cost of capital, WACC, and CAPM. Cost of capital: the cost of corporate`s fund, including debt and equity. It is the minimum return rate that shareholders, investors, and lenders expect to compensate their risks. It is also the minimum profit that corporate tends to generate. WACC: weighted average cost of capital. It is a way to calculate cost of capital based on company`s financial structure. It gives corresponding weight to different source of funds, which required different rate of return. CAPM: capital asset pricing model. This model calculates the expected return of shareholders by risk-free rate, measure of systematic risk, and equity market risk premium. III. Address what you use “cost of capital” to evaluate. How are Mortensen’s estimates used at Midland? I will use “cost of capital” to evaluate the followings: 1. Planning investment. If this investment will meet the requirement; 2...
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...Introduction Midland Energy Resources have a senior vice president, Janet Mortension, of project finance. She was preparing her annual cost of capital for midland as well as for each of its following three divisions: * Exploration & production (E&P) * Refining & Marketing (R&M) * Petrochemicals Midland was a global company with operations in oil and gas. Midland corporate treasury had began analysis and preparation of annual cost of capital for the corporation as a whole and for each divisions as part of annual capital budgeting process but this estimates were often criticized, and Midland division presidents and controllers sometimes challenged specific assumptions and inputs. The case uses comparable companies to estimate asset and beta for each individual division, and must comply the capital asset pricing model for calculating the cost of capital. Midland was conservative compared to some of its large competitors, but it has a group of trader in- house who actively managed currency. Interest rate and commodity risks within a set of guideline approved by the Board. Midland Energy Resources ha d been incorporated more than 120 years previously and in 2007 had more than 80,000 employees. Midland’s financial strategy in 2007 was founded on the following four pillars: * Oversees Growth * Value- Creating Investment * Optimal capital structure * Stock Repurchases Oversees Growth: Oversees investment were the main engine of growth...
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...MBA: 638 Caselette: Village Volvo 1) Village Volvo has several unique service packages. First of all we can talk about their supporting facility. Village Volvo is located in a suburban location. This might discourage some clients. They should increase the shuttle services for the convenience of their customers. To establish the proper mood Village Volvo has an office, waiting area, storage, and four bays. The facilitating goods provided by the Village Volvo are the replacement auto parts. The owners also had developed a network with other service providers. They refer their clients to other service provider if there is some thing which they can not do. Village Volvo also uses another source of information which that calls Custom Care Vehicle Dossier (CCVD). They maintain a file on every car they inspect. This helps the mechanic to keep a record on the car and also it helps remind the customer that there is a maintenance procedure due on their car. The explicit services are something which is readily observable. The customers know before hand that they are going Village Volvo to get their car repaired. The owners combined experience is 22 years at a local Volvo dealership. Thus, the customers would not be worried that the person working on their car has no experience working on Volvo’s. There are some procedures which they don not perform. For that Village Volvo recommend different places where they can get their cat fixed. Lastly, implicit services which is a psychological...
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...Renewable Energy 50 (2013) 456e463 Contents lists available at SciVerse ScienceDirect Renewable Energy journal homepage: www.elsevier.com/locate/renene Overview of potential and utilization of renewable energy sources in Turkey E. Toklu* Department of Mechanical Engineering, Duzce University, Düzce, Turkey a r t i c l e i n f o Article history: Received 22 May 2012 Accepted 20 June 2012 Available online 9 August 2012 Keywords: Energy utilization Renewable energy Sustainable development Turkey a b s t r a c t The necessity of minimizing environmental impacts of energy use, particularly those with potentially worrisome global effects, is perhaps the greatest challenge resulting from the twentieth century’s energy advances. The renewable energy technologies of wind, biofuels, solar thermal and photovoltaics are nally showing maturity and the ultimate promise of cost competitiveness. Turkey’s demand for energy and electricity is increasing rapidly and heavily dependent on expensive imported fossil energy resources that place a big burden on the economy and environmental pollution is becoming an important concern in the country. With respect to global environmental issues, Turkey’s carbon dioxide emissions have grown along with its energy consumption. States have played a leading role in protecting the environment by reducing emissions of greenhouse gases. In this regard, renewable energy resources appear to be the one of the most ef cient and effective solutions...
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...| | |NAME : RAUNAK ZATAKIA | | | |COURSE : ( BBA / TP / ) | | | |SUPERVISOR : Prof. Tapobrata Ray | | | |TITLE : Telecom Industry Marketing | |DATE : 06.12.2013 | Dissertation submitted in partial fulfilment Of the requirements of the Graduate Degree BACHELOR IN BUSINESS ADMINISTRATION J.D.BIRLA INSTITUE At the JADAVPUR UNIVERSITY KOLKATA The Controller of Examination, Jadavpur University, Kolkata Respected sir, This research work has been conducted by me and is an...
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...Opportunities for Women in Renewable Energy Technology Use in Bangladesh (Phase I) April 2004 Joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP) and Bank Netherlands Water Partnership Program (BNWPP) Contents Preface........................................................................................................................vii Abbreviations and Acronyms....................................................................................xi Executive Summary.................................................................................................xiii Background and Context .................................................................................xiii Objectives ....................................................................................................... xiv Coastal Electrification and Women’s Development Microenterprise (CEWDM) ............................................................................................. xv Development of Training Modules ................................................................... xv Operational Performance................................................................................ xvi Social Outcomes............................................................................................. xvi Electrification Options as a Function of Household Income .......................... xvi Costs of Rural Lighting and Electrification.................................................
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...the world largest natural gas and oil exploration and Production Company. The industry was formed in 1959 as a pipeline company and continued to flourish in business until it became an oil production company in 1986. It continuously followed the trend of success up to date. It operates in southern United States, Rocky Mountains region, and Appalachian basin. Further, it is a premier deepwater producer in Mexico, and production in Algeria, Ghana, Alaska, West Africa and some parts of east Africa. According to the 2012 financial report, Anadarko delivered sales of 268 million BOE, which was an increase of 8% from 2011. By the end of 2012, the company had a reserve of 2.56 billion barrels of oil. The company is committed to safe production energy in a way that protects the environment, public health and the communities (Anadarko Petroleum Corporation, 2013). Anadarko was created in 1959 as a wholly owned subsidiary of Panhandle Eastern Pipe Line Company after the discovery of large amounts of natural gas in the Anadarko Basin, thus the company's name. Anadarko spun off from Panhandle Eastern as an independent corporation in 1986 and now has activities in more than a dozen countries. Anadarko’s NAICS code is 211111 and SIC code is 131101. Their stock symbol is APC and their stock price as of October 28th, 2013 is $96.58 per share. B) Current organizational challenges and strategies Anadarko operates in a dynamic and highly competitive market...
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