...Study Questions: Midland Energy Resources, Inc: Cost of Capital Janet Mortensen, senior vice president of project finance at Midland Energy Resources, is in the process of preparing her annual cost of capital estimates for Midland and each of its three divisions (oil and gas exploration and production (E&P), refining and marketing (R&M), and petrochemicals). These estimates are used in many analyses within Midland, including capital budgeting decisions, financial accounting, performance appraisals, M&A proposals, and stock repurchase decisions. There has been some disagreement in the past about specific inputs and assumptions used to arrive at the cost of capital estimate, so Mortensen needs to devote extra care in preparing the cost of capital estimates and justifying her assumptions. These questions relate to the Midland Energy Resources, Inc: Cost of Capital case. You can find the data for this case on the course website in a spreadsheet named: Midland Energy Resources Exhibits.xls. 1. For what purposes does Mortensen estimate Midland’s cost of capital? What would be the potential consequences of a too high estimate compared to the firm’s “true” cost of capital? What about a too low estimate? Mortensen estimates Midland’s cost of capital to use for other analyses within Midland such as capital budgeting and financial accounting, performance assessments, M&A proposals, and stock repurchase decisions. If the cost of capital is too high, Midland could miss out...
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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...
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...1. To make an estimate of the cost of capital of Midland Energy Resources, Inc. It will use this information for asset appraisals for both capital budgeting and financial accounting, performance assessments, M&A proposals, and stock repurchase decisions. 2. 4.98% (30 year) would be the best risk-free rate for Midland since refining and marketing is the largest division in the company and refining and marketing division’s projects are mostly long-term projects. 3. Consolidated: 4.98 + 1.62 = 6.60% E&P : 4.98 + 1.60 = 6.58% R&M : 4.98 + 1.80 = 6.78% Petrochemicals: 4.98 + 1.35 = 6.33% Each division has different business operations which has different risks. 4. 40% ([Taxes] / [Income Before Taxes]*100) 5. Yes. Average excess return on US equities to T-bonds shows 5.1% from 1998-2006. Additionally, two empirical values for EMRP averages out to 5% range. 6. 4.98% + 5% * 1.25 = 11.24% 7. = (59.3/159.3)*0.066*(1-0.4) + 100/159.3 * 0.1124 = 8.53% 8. (Unlevered asset beta) = = (100/159.3) * 1.25 = 0.78 9. (WACC with no debt) = (100/159.3) * K_e = 100/159.3 * (0.0498 + 0.78*0.05) = 5.57% 10. (re-levered equity beta) = 1/(1-(42.2/142.2)) * 0.78 = 1.11 (Cost of equity) = 0.0498+0.05*1.11 = 10.53% = 42.2/142.2 * 0.066 * (1-0.4) + (100/142.2) * 0.1053 = 8.58% Since WACC increased in new D/E ratio, firm’s investment choice’s return rate must be higher than...
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...财务管理案例一翻译稿 Midland Energy Resources, Inc.: Cost of Capital 2007年1月下旬，负责Midland能源项目融资的高级副总裁，Mortensen，正在编制Midland及其三个主要业务部门的年度资金成本估算报告。Midland是一个全球性的能源公司，其主要业务为石油和天然气勘探生产（E＆P），炼油与销售（R＆M），以及石化业务。综合起来看，该公司2006年营业额和营业收益分别为248.5亿美元和42.2亿美元。 在Midland内部，很多的分析需要用到资金成本估评，包括：资本预算和财务核算，绩效评估，M&A 提案，以及股票回购的决定。这些分析有些是在部门或业务单位层面来完成的，有些是在公司层面来完成的。早在20世纪80年代初，Midland的企业财务人员就已经开始为公司以及各部门编制年度资金成本估算。然而，由财务人员编制的估算却常受到批评，公司的各部门领导有时会对特定的假设以及使用的数据提出质疑。 2002年，Mortensen，一位直接受命于CFO的资深分析师，被指派去完成Midland公司股票回购资金成本的估评。半年后，她被指派去计算公司和各部门资本的成本，旨在将公司高层执行机构和赔偿委员会一并纳入计划绩效评估。从那时起，Mortensen便每年开展类似的工作，只要是她做出的估评，即便是公司没有正式要求过的估评，就会成为广泛认可的公司标准。2007年，Mortensen意识到她的报告已成为公司权威，便倾注了更多的精力，精心准备。最近，她在思考，这些估算是否适用于所有的场合，因此，她在考虑对2007年的各种计算增设一套类似于“使用者指南”的文件。 Midland的业务 Midland已经开门做生意120多年了，截止2007年，公司共计80000雇员， Exhibits 1 and 2是Midland的综合财务报表，Exhibit 3是公司2004年至2006年的选定业务分部数据。 勘探与生产 Midland从事勘探，开发和生产各个阶段的业务，然而，生产却是E＆P部门的年度经营业绩报告的主体。在 2006年期间，Midland每天大约开采2.1 millon桶油，较2005增长6.3％，每天生产大约7.28 billion立方英尺天然气，相比2005年，增长率略低于1％。这些生产为公司带来22.4 billion美元的营收和12.6 billion美元的税后盈利。 E＆P是Midland最赚钱的业务，其在过去五年的净利率达到业界最高水平。 Midland预测全球人口和经济将继续增长，未来全球对其产品的需求将进一步上升。不过，来自于非传统领域的产品，如深水钻井，稠油开采，液化天然气（LNG），以及极地开采技术预计是增长的一部分。此外，产品出产地的地理结构也在发生偏移，如中东，中亚，俄罗斯，西非地区的出产地呈增加趋势。 07年，油价达到历史性的高位，Midland加大了对未开发的新兴资源储备的投资以扩大生产。持续走高的价格，刺激了其对精细开采技术的投资，这些技术能延展现存油田和海洋资源的生命期。07和08年，公司在E&P部门的投资预计将超过$8 billion。 炼油与销售 Midland在全球拥有40个炼油厂，炼化能力达5.0 million 桶/天，如果以营业收入来衡量的话，炼油与销售在其全球营收上占据大笔江山。2006，炼油与销售的营收为$ 203 billion，较2005年减少约1.8%。由于这些产品已高度商业化，这个部门面对着激烈的竞争。其税后利润仅为$4...
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...what recommendations would you make and why? A- - rd = 30 years to US debt treasury + Spread to treasury rd = 1.62% + 4.98% = 6.6% - Tax average of 2004, 2005 and 2006 Tax average = 41.4% + 39.2% + 38.6% = 39.7% - From Exhibit 6 the historical data shown on EMRP of nearly 6% whereas as per the surveys conducted by financial analysts and firms indicates EMRP to range between 2.5% to 4.7%; analysts on financial markets have a better understanding of the overall market scenario and are well aware about the performance of various companies so their estimate of 5% seems appropriate. - Based on our Calculations Shown on Excel corporate WACC = 8.53% 3. Should Midland use a single corporate hurdle rate for evaluating investment opportunities in all of its divisions? Why or why not? A- Midland should use different hurdle rates per division as it reflects the minimum rate of return required on investment. As per Exhibit 5 the equity Beta for each division (E&P, Refining & Marketing) is different so the riskier the project the higher the hurdle rate. 4. Compute a separate cost of capital for the E&P and Marketing & Refining divisions. What causes them to differ from one another? A- The spread to Treasury is...
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...QUESTIONS FOR THE OVERALL ASSIGNMENT 1. What is the best way to estimate the company and divisions’ cost of capital? Answer: The best way to estimate the cost of capital is by using the CAPM (Capital Asset Pricing Model) where the Weighted-Average Cost of Capital (rwacc) is given by the formula Where, D is the market value of the net debt E is the market value of the total equity V is the total market value of debt and equity = D + E T is the corporate tax rate rd is the appropriately calculated discount rate for debt (cost of debt) re is the appropriately calculated discount rate for equity (cost of equity) The cost of capital (rwacc) for the company can be calculated from the observable market values of debt (D), equity (E), & corporate tax rate (T) and calculated discount rate for debt (rd) & discount rate for equity (re). The market values of debt can be estimated from the company’s current amount of debt, their maturity levels, and credit rating and by utilizing the risk-free rate that can be observed in the market. The market value of equity can be estimated from multiplying the total number of outstanding shares and the company’s stock-price. The discount rate for debt can be calculated from on market value of debt and credit rating for the company’s debt, which includes adjustments for the company debt’s default risk. The discount rate for equity can be calculated from estimated values for the equity market risk premium (EMRP) and risk level (beta)...
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...1. How are Mortensen’s estimates of Midland’s cost of capital used? How, if at all, should these anticipated uses affect the calculations? Mortensen’s cost of capital estimates are used for a variety of purposes at both the divisional and corporate levels. Examples include internal analyses such as financial accounting, performance assessment and capital budgeting, while others are used for strategic planning purposes such as merger and acquisition, as well as stock repurchase decisions (Luehrman and Heilprin, 2009, pg.1). When used at the divisional rather than corporate level, special consideration should be given to the fact that Midland’s divisions are not publicly traded entities, and therefore do not have individual Beta figures. In order to properly assess the cost of capital for Midland’s divisions, Mortensen collected beta estimates from several businesses with operations similar to those of Midland’s divisions and used the average of these estimates to derive a beta estimate for divisional beta estimates (pg.6). 2. Calculate Midland’s corporate WACC. Be prepared to defend your specific assumptions about the various inputs to the calculations (risk-free rate, equity market risk premium (EMRP), beta). Is Midland’s choice of EMRP appropriate? If not, what recommendations would you make and why? Midland’s corporate WACC is 9.17%. Please see exhibit 1 for supporting calculations. The risk-free rate for 2006 came from the Department of Treasury’s website...
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...Question 1: A, The risk free rate used to calculate the cost of equity of Midland company is the 30-year yield to maturity for US Treasury Bonds: Rf = 4.98%. The company has long term projects for the future; it’s relevant to use a long-term risk free rate. The equity market risk premium is 5% that the company already used in 2006 and obtained after research and consultation with professionals. On Exhibit 6, the respondents’ risk premium of three surveys showed that the range is about 2% to 5.6% in 2006. Despite the average market risk premium is 6.4%, which is higher than the range on the surveys, the EMRP of 5% that we choose seems to be reasonable compared to other companies. In 2006, the debt over equity ratio is 59.3%: D/E = 59.3% D=59.3%E D+E=1.593E = V E/V = 1/1.593= 62.8% D/V = 1-62.8% =37.2%. In the estimates of 2007, D/V = 42.2% E/V = 1-42.2% = 57.8%. The capital structure of the company in 2006 and 2007 is below: Unlverved beta : Bu= Bl(1+1-TDE) Bu= 1.25(1+1-.39737.2%62.8%)=0.921 Levered beta in 2007:Bl=Bu (1+(1-T)(DE) Bl=0.921 (1+(1-.397)(42.2%57.8%)=1.32 Cost of Equity: Re = Rr + β(EMRP) = 4.98% + 1.32*5% = 11.58% Cost of Debt = Spread to Treasury + US T-Bond rate Based on exhibit 1, we calculate the arithmetic average tax rate over 3 years (2004-2006) to forecast the tax rate in the future: Tax rate = Taxes/Income before taxes = 13741417910+1283032723+1174730447 = 0.397 = 39.7% WACC=Rd 1-TDV+ Re EV WACC=0...
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...Demica Report Series April 2009 Issue no.10 Research Report Strengthening the Links issue no. 10 Supply Chain Finance A Third Report from Demica Demica Report Series April 2009 Issue no.10 Summary Continuing tight credit conditions have made liquidity scarce. Corporations want to extend payment terms for their supply chain, but suppliers are finding it difficult or impossible to accommodate this requirement. Demica’s latest research report into Supply Chain Finance (SCF) compares the situation in the UK and Germany and reveals that 88% of UK firms and 55% of German companies have identified that key suppliers are unable to sustain further lengthening of payment periods. As a solution to this situation SCF is generating much enthusiasm amongst banks and their corporate customers as a means of substituting for lower credit availability. Supply Chain Finance structures not only allow large corporations to extend their credit terms with suppliers, but their suppliers can also use the credit quality of their receivables debtors to finance their receivables at favourable rates based on the individual debtor credit profile. Some 43% of German companies and 61% of British firms are planning to monetise their receivables/payables to provide liquidity within their supply chain. This report updates Demica’s first two Supply Chain Finance research projects from 2007 and 2008 and reveals that the majority of Germany and UK firms believe their banking relationships...
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...The current issue and full text archive of this journal is available at www.emeraldinsight.com/0307-4358.htm Analysis of the effects of ESOP adoption on the company cost of capital Stoyu I. Ivanov Accounting and Finance Department, College of Business, San Jose State University, San Jose, California, USA, and ESOP adoption 173 Janis K. Zaima Accounting and Finance Department, San Jose State University, San Jose, California, USA Abstract Purpose – The purpose of this study is to examine whether employee stock ownership plans (ESOPs) add or destroy value from a new perspective by examining the relation of the adoption of ESOP and the company cost of capital. Design/methodology/approach – The capital asset pricing model is used to estimate the company’s cost of equity capital, and the cost of debt is estimated using bond yield spreads. The weighted average cost of capital (WACC) is calculated as the weighted percentage of the firm funded by equity, preferred stock, and debt multiplied by the individual costs of capital. Univariate and multivariate analyses are conducted around the event of adoption to determine if the cost of capital changes after the adoption of ESOP. Findings – Results from the univariate analysis show that firms adopting leveraged as well as non-leveraged ESOP plans experience decreases in costs of equity and debt capital as well as decreases in their WACC. However, the multivariate analysis demonstrates that only the non-leveraged common ESOPs...
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...Case Analysis: Midland Energy Resources, INC.: Cost of Capital Midland’s consolidated balance sheet and its access to global financial and commodity markets Midland Energy Resources, Inc. was a global integrated oil and gas company. It had sometimes presented attractive opportunities to trade securities and commodities. Midland was been incorporated more than 120 years with more than 80000 employees in 2007. Midland conservative compared to some of its large competitors, but it did have a group of traders in-house had three main divisions, which were exploration and production (E&P), refining and who actively managed currency, interest rate, and commodity risks within a set of guidelines marketing (R&M), and petrochemicals. Each division engaged in different operations and approved by the board. The desire to manage certain risks, or to take advantage of private had unique characteristics. For instance, E&P concentrated on oil exploration, information or unusual pricing relationships, was an additional reason that the actual capital development, and production. It was Midland’s most profitable division with anticipated structure sometimes departed, temporarily, from planned targets. heavy investment in future expanding projects, but it was also the most exposed division to geopolitical risk. R&M was the largest division by revenue, but with small profit margin. Stock Repurchases The projected capital spending for this division was expected to be stable. The smallest ...
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...Midland Energy Resources, Inc.: Cost of Capital This case describe an global energy company, whose name is Midland, with three operations in oil and gas exploration and production (E&P), refining and marketing (R&M), and petrochemicals. We are going to calculate the cost of the capital of this company, and answer the following three questions. What are the cost of capital for Midland debt and equity? What is the WACC for Midland? What should be the cost of capital for Midland operational divisions? Cost of Debt Assume the business is on-going for a long period of time. We use 4.98% rate as Rf from 30 years U.S. Treasury bond. Rd=Rf+Spread to Treasury Consolidated: Rd=4.98%+1.62%=5.6% Exploration & Production: Rd=4.98%+1.60%=6.58% Refining & Marketing: Rd=4.98%+1.80%=6.78% Petrochemicals: Rd=4.98%+1.35%=6.33% Cost of Equity To calculate the cost of equity, we use the Capital Asset Pricing Model. Rf stands for the risk-free rate of return, B is a measure of systematic risk, and EMRP denotes the equity market risk premium. For EMRP, Midland adopted the estimate of 5.0%. We assume the Beta for Exploration & Production and Refining & Marketing is the average of the companies listed in Exhibit 5, which are 1.15 and 1.20, respectively. We also assume the company’s Beta is the weighted average of the three operations an assets level, which is 1.25. Then the Beta for Petrochemicals is calculated to be 1.91. Consolidated: Re=4.98%+1.25(5%)...
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...industry. The company started repositioning its onshore strategies in 2009 and completed in 2013, shifting its operations from the offshore waters in the Gulf of Mexico to the onshore, Permian Basin region in West Texas. After fully divesting from the Medusa field in the Gulf of Mexico, Callon has turned into a pure-play concentrating 100% of its business at Midland Basin, a sub-basin located within Permian Basin. Why Permian Basin? The Permian Basin has supported production since the 1940s. It has long been the most important oil and gas producing area in the United States. The producers operating in the Basin benefits from rich oil and gas reserve loaded in the world’s thickest deposits of rocks, well-established infrastructure from historical operations and relatively stable regulatory environment that has been established over the time. The business strategy of Callon is to establish resource base and acreage position in the core of Permian Basin. Callon expends its asset base through self-development and acquisition of acreage. As of March 2016, Callon holds roughly 17,675 net surface acres in the Southern and Central Midland Basin that are prospective for multiple oil-bearing intervals. Specifically, the company’s production growth potential comes from five currently producing zones, including the Lower Spraberry, Middle Spraberry, Wolfcamp A, the Upper Wolfcamp B and the Lower Wolfcamp B. Callon develops resources exclusively through horizontal drilling technology, both from...
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...Healthy Party Dishes Sweet Pea Guacamole • 1-2 cloves garlic • 1 pound bag of frozen peas, defrosted • 2 tablespoons lemon juice or 1 tablespoon lemon juice + 1 tablespoon lime juice • 2 tablespoons fire roasted chile peppers (though I bet I could have used the whole can … it was small and the dip wasn’t spicy) • 1 tablespoon olive oil • 1/2 teaspoon sea salt • 1/2 teaspoon to 1 teaspoon ground cumin • 1/2 cup packed fresh cilantro • 1/4 cup finely chopped onion (your choice) • 1 tomato, chopped • lots of freshly ground black pepper Puree the peas, garlic, chiles, lemon juice, olive oil, salt, pepper and cumin until smooth. Pulse in the cilantro, onion and tomato. Taste and increase seasonings to your liking. Just a few notes. Because the peas are so sweet, you probably want lemon juice as opposed to lime; it’ll give your dip a little more kick. But try it out and see what works for you. You can add raw jalepenos for more spice and always more garlic and cumin. This guacamole was perfect served with thick, organic, restaurant-style yellow corn chips. Healthy spinach dip Healthy Artichoke and Spinach Dip Recipe • This delicious recipe couples two great veggies with a few simple ingredients to make a dip that is both healthful and palate pleasing. You will need 10 artichoke hearts (may use canned), a handful of baby or regular spinach (coarsely chopped), 2 small garlic cloves, 1/2 tsp. cumin and a bit of olive oil to get the dip consistency just right. Put all...
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...of this structure against other types of organizational structure. The FTSE UK index series is designed to represent the performance of UK companies, providing investors with a comprehensive set of indices that measure the performance of all capital and industry segments of the UK equity market. HSBC is on the 3rd rank of FTSE 100. History of HSBC HSBC Bank plc and its subsidiaries form a UK-based group providing a comprehensive range of banking and related financial services. HSBC Bank plc (formerly Midland Bank plc) was formed in England in 1836 and subsequently registered as a limited company in 1880. In 1923, the company adopted the name of Midland Bank Limited which it held until 1982 when the name was changed to Midland Bank plc. During the year ended 31 December 1992, Midland Bank plc became a wholly owned subsidiary undertaking of HSBC Holdings PLC (“HSBC Holdings”), whose Headquartered is in London. HSBC Bank plc adopted its current name, changing from Midland Bank plc, in the year ended 31 December 1999. The HSBC Group is one of the largest banking and financial services organisations in the world, with over 9,500 offices in 79 countries and territories in Europe, Hong Kong, the rest of Asia-Pacific, including the Middle East and Africa, North America and South America. Its total assets at 31 December 2009 were £579 billion. The Bank is the HSBC Group’s principal operating subsidiary undertaking in Europe. As at 31 December 2003, the Bank’s principal subsidiary...
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