Midland energy resources case solution cost of capital

Midland energy case pdf

Thus using different hurdle rates for each division would allow Midland to more accurately reflect the risks and benefits of each investment and allow the company to make comparisons based on factors that are unique to each industry that the divisions operate in. To find the unlevered asset beta, we can assign a weight to each division based on the contribution of assets by each division to total assets for Mortensen accurately assess that due to the nature of the business of each division and their current financial position the credit rating of each division will be different. Furthermore, it is possible for shareholders to see a lower return on their investment. Does your conclusion in 3 change if you instead assume that Ocean Carriers operates the capesize for the full life of 25 years before selling it for scrap value grown by inflation? In evaluating value-adding investments, the cost of capital is used to discount project cash flows. Divisional Cost of Capital The use of a single corporate hurdle rate for evaluating investment opportunities in all its divisions would assume that the risk and return for each investment would be the same across all divisions. The 1year rate does not capture the assets financing the borrowing and the 30 year rate is not appropriate given the changes that are possible in the industry in that timeframe that Midland cannot adequately capture and model in its business. The too high estimated cost of capital means that Midland may miss out on investment opportunities and will under value the investment at hand. Midlands target debt ratio for each division also varies which would change the cost of capital across divisions. As the economy has been more uncertain, investors are demanding higher return to compensate for the increased risk. To meet these goals, Midland must calculate an appropriate cost of capital.

Does your conclusion in 3 change if you instead assume that Ocean Carriers operates the capesize for the full life of 25 years before selling it for scrap value grown by inflation? On the other hand, appraisals of certain long lived assets, cash inflows or outflows may be at a lower risk than the company average and hence the numbers contributing to the cost of capital should be adjusted accordingly.

The primary goals of Midlands financial strategy are to fund substantial overseas growth, invest in value-creating projects, achieve an optimal capital structure, and repurchase undervalued shares.

To meet these goals, Midland must calculate an appropriate cost of capital. This makes the cost of debt as 4.

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For CAPM approach…. Mortensen accurately assess that due to the nature of the business of each division and their current financial position the credit rating of each division will be different. Treasury Bonds Case study - table 2 plus the spread to Treasury for the consolidated company calculated as presented in Case Study - Table 1.

Divisional Cost of Capital The use of a single corporate hurdle rate for evaluating investment opportunities in all its divisions would assume that the risk and return for each investment would be the same across all divisions. But each of the Midlands three divisions exhibit different risk profiles due to their nature of business.

On the other hand, a too low estimated cost of capital …show more content… In the other hand, the risks of investment opportunities vary.

Wacc

Midlands Petrochemicals division is investing mostly in overseas markets that carry different risks like exchange Page 2 E Midland Energy Case Analysis Rohith Kori rate risk, political risk and interest rate risk compared to the more mature Refining and Marketing business. The case is set in early , nearly two years after significant modifications in these systems and procedures. Divisional Cost of Capital The use of a single corporate hurdle rate for evaluating investment opportunities in all its divisions would assume that the risk and return for each investment would be the same across all divisions. On the other hand, a too low estimated cost of capital …show more content… In the other hand, the risks of investment opportunities vary. So the riskier projects deserve higher hurdle rates while the less riskier ones should lower their hurdle rates. On the other hand, appraisals of certain long lived assets, cash inflows or outflows may be at a lower risk than the company average and hence the numbers contributing to the cost of capital should be adjusted accordingly. The Refining and Marketing division is the largest contributing To optimize its capital structure, Midland continuously evaluated its ideal borrowing based on its inherent cost. The too high estimated cost of capital means that Midland may miss out on investment opportunities and will under value the investment at hand. Cost of Capital for Petrochemicals The cost of capital for petrochemicals can be calculated by finding the unlevered asset beta for petrochemicals and using that to calculate the equity beta for petrochemicals divisions. The risk free rate is assumed to be 4. The corporate tax rate is assumed to be

If the projects are of greater or lesser risk, then the calculations of WACC may be affected. The Exploration and Production division has a higher demand for capital expenditures exhibit 3 for development but also offers higher margin of return an average of Furthermore, it is possible for shareholders to see a lower return on their investment.

Midland energy resources case solution cost of capital

Cost of Capital for Petrochemicals The cost of capital for petrochemicals can be calculated by finding the unlevered asset beta for petrochemicals and using that to calculate the equity beta for petrochemicals divisions. Treasury Bonds Case study - table 2 plus the spread to Treasury for the consolidated company calculated as presented in Case Study - Table 1. To meet these goals, Midland must calculate an appropriate cost of capital. Midlands Petrochemicals division is investing mostly in overseas markets that carry different risks like exchange Page 2 E Midland Energy Case Analysis Rohith Kori rate risk, political risk and interest rate risk compared to the more mature Refining and Marketing business. In funding overseas growth, Midland uses the cost of capital estimated by Mortensen to analyze, evaluate, and convert foreign cash flows. If the projects are of greater or lesser risk, then the calculations of WACC may be affected. For what purposes does Mortensen estimate Midland's cost of capital? The corporate tax rate is assumed to be

Keywords: capital budgeting ; capital expenditures-equipment ; capital expenditures-machinery ; valuation ; internal rate of return ; discounted cash flows ; net present value ; Cost of Capital ; Valuation ; Cash Flow ; System ; Organizational Culture ; Policy ; Business Processes ; Capital Budgeting ; Citation: Luehrman, Timothy A.

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