Scribd Logo
Upload

Welcome to Scribd!

  • 67 views

    Midland Energy Resources Case Assignment

    Uploaded by

    Andrew Choi
    To calculate the cost of capital for Midland's Petrochemical division, the unlevered betas of each division are weighted based on their proportion of Midland's total assets. This provides an equity beta of 1.408 for the Petrochemical division. Using this beta, along with the treasury rate, debt/equity ratio and tax rate, results in a cost of equity of 11.93% and cost of debt of 6.01%, yielding a WACC of 8.18% for the Petrochemical division. The division's cost of capital differs from the corporate WACC due to having a unique beta based on its asset weighting within Midland.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd

    Midland Energy Resources Case Assignment

    Uploaded by

    Andrew Choi
    67 views10 pages
    To calculate the cost of capital for Midland's Petrochemical division, the unlevered betas of each division are weighted based on their proportion of Midland's total assets. This provides an equity beta of 1.408 for the Petrochemical division. Using this beta, along with the treasury rate, debt/equity ratio and tax rate, results in a cost of equity of 11.93% and cost of debt of 6.01%, yielding a WACC of 8.18% for the Petrochemical division. The division's cost of capital differs from the corporate WACC due to having a unique beta based on its asset weighting within Midland.

    Copyright

    © © All Rights Reserved

    Available Formats

    XLSX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    To calculate the cost of capital for Midland's Petrochemical division, the unlevered betas of each division are weighted based on their proportion of Midland's total assets. This provides an equity beta of 1.408 for the Petrochemical division. Using this beta, along with the treasury rate, debt/equity ratio and tax rate, results in a cost of equity of 11.93% and cost of debt of 6.01%, yielding a WACC of 8.18% for the Petrochemical division. The division's cost of capital differs from the corporate WACC due to having a unique beta based on its asset weighting within Midland.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    67 views10 pages

    Midland Energy Resources Case Assignment

    Uploaded by

    Andrew Choi
    To calculate the cost of capital for Midland's Petrochemical division, the unlevered betas of each division are weighted based on their proportion of Midland's total assets. This provides an equity beta of 1.408 for the Petrochemical division. Using this beta, along with the treasury rate, debt/equity ratio and tax rate, results in a cost of equity of 11.93% and cost of debt of 6.01%, yielding a WACC of 8.18% for the Petrochemical division. The division's cost of capital differs from the corporate WACC due to having a unique beta based on its asset weighting within Midland.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    of 10

    Calculate Midland’s corporate WACC.

    Explain your specific assumptions about the various inputs to the calculation

    rd(D/V)(1-t)+re((E/V)
    Item Assumptions
    10 year treasury rate (Table 1) 4.66
    Spread to Treasury (Table 1) 1.62
    rD 6.28 This was calculated from the 10-year rate table plus the spread

    Equity Beta (Exhibit 5) 1.25


    Debt/Equity 0.593
    Unlevered Beta 0.916281259
    Debt/Value 0.422
    Equity Value 75237.45658
    Debt Value 54931.15342
    D/E 0.7301038062
    Equity Beta 1.327157015
    rE (re = rf + B(EMRP)) 11.29578507 This was calculated by using the cost of equity formula.

    Income before taxes 30447


    Income tax expense 11747
    Tax rate (T) 0.3858179788 The numbers were taken from the income statement.

    number of shares outstanding 2951


    Current share price 44.11
    market value of equity 130168.61 Exhibit 4 shows the stock price and the shares outstanding.

    Current portion of long term debt 26534


    long term debt 82414
    Value of debt 108948 Exhibit 2 is the balance sheet that contains the current long term

    Total (E+D) 239116.61 By adding the value of equity (market value) and total debt, we find
    Percentage of equity 0.5443729317 Divided the equity portion by the total value.
    percentage of debt 0.4556270683 Divided the debt portion by the total value.

    WACC (rd(D/V)(1-t)+re((E/V)) 7.906501985 This was calculated by following the WACC formula.
    the various inputs to the calculations

    10-year rate table plus the spread

    the cost of equity formula.

    m the income statement.

    ce and the shares outstanding.

    t that contains the current long term debt and total long term debt values.

    (market value) and total debt, we find the total value of Midland.
    the total value.
    e total value.

    ng the WACC formula.


    Should Midland use a single corporate hurdle rate for evaluating investment opportunities in all of its divisions? Why

    Because Midland is comprised of different divisions with different financials and risk, it's more appropriate
    use different rates within each of its divisions. Doing so will better reflect the risks and profits of each divis
    differ from each other and have different risks. It will also allow Midland to gauge how each division based
    each respective industry compared to competitors.
    es in all of its divisions? Why or why not?

    risk, it's more appropriate for Midland to


    s and profits of each divison which
    how each division based on factors in
    Compute a separate cost of capital for the E&P and Marketing & Refining divisions. What causes them to differ from

    better sense of the exploreation and production market. This led to a cost of equity of 11.08% and a cost of
    the exploreation and production division. Doing the same for the refining and marketing division, we cacula

    Exploration and Production Division

    10 year treasury rate (Table 1) 4.66


    Spread to Treasury (Table 1) 1.6
    rD 6.26 This was calculated from the 10-year rate table plus the spread

    Equity Beta (Exhibit 5) 1.15


    Debt/Equity 0.593
    Unlevered Beta 0.8429787582
    Debt/Value 0.46
    Equity Value 70291.0494
    Debt Value 59877.5606
    D/E 0.8518518519
    Equity Beta 1.284018578
    rE (re = rf + B(EMRP)) 11.08009289 This was calculated by using the cost of equity formula.

    Income before taxes 30447


    Income tax expense 11747
    Tax rate (T) 0.3858179788 The numbers were taken from the income statement.

    number of shares outstanding 2951


    Current share price 44.11
    market value of equity 130168.61 Exhibit 4 shows the stock price and the shares outstanding.

    Current portion of long term debt 26534


    long term debt 82414
    Value of debt 108948 Exhibit 2 is the balance sheet that contains the current long term d

    Total (E+D) 239116.61 By adding the value of equity (market value) and total debt, we fin
    Percentage of equity 0.5443729317 Divided the equity portion by the total value.
    percentage of debt 0.4556270683 Divided the debt portion by the total value.

    WACC (rd(D/V)(1-t)+re((E/V)) 7.783488241 This was calculated by following the WACC formula.

    Refining and Marketing Division


    10 year treasury rate (Table 1) 4.66
    Spread to Treasury (Table 1) 1.8
    rD 6.46 This was calculated from the 10-year rate table plus the spread

    Equity Beta (Exhibit 5) 1.2


    Debt/Equity 0.593
    Unlevered Beta 0.8796300086
    Debt/Value 0.31
    Equity Value 89816.3409
    Debt Value 40352.2691
    D/E 0.4492753623
    Equity Beta 1.122352342
    rE (re = rf + B(EMRP)) 10.27176171 This was calculated by using the cost of equity formula.

    Income before taxes 30447


    Income tax expense 11747
    Tax rate (T) 0.3858179788 The numbers were taken from the income statement.

    number of shares outstanding 2951


    Current share price 44.11
    market value of equity 130168.61 Exhibit 4 shows the stock price and the shares outstanding.

    Current portion of long term debt 26534


    long term debt 82414
    Value of debt 108948 Exhibit 2 is the balance sheet that contains the current long term d

    Total (E+D) 239116.61 By adding the value of equity (market value) and total debt, we fin
    Percentage of equity 0.5443729317 Divided the equity portion by the total value.
    percentage of debt 0.4556270683 Divided the debt portion by the total value.

    WACC (rd(D/V)(1-t)+re((E/V)) 7.399422218 This was calculated by following the WACC formula.
    causes them to differ from one another?

    of 11.08% and a cost of debt of 6.26% in


    eting division, we caculated a cost of

    rate table plus the spread

    of equity formula.

    ome statement.

    e shares outstanding.

    ins the current long term debt and total long term debt values.

    alue) and total debt, we find the total value of Midland.

    WACC formula.
    rate table plus the spread

    of equity formula.

    ome statement.

    e shares outstanding.

    ins the current long term debt and total long term debt values.

    alue) and total debt, we find the total value of Midland.

    WACC formula.
    How would you compute a cost of capital for the Petrochemical division?

    To find the unlevered beta of petrochemical division, we must get the weights of
    each division using Exhibit 3 and multiplying the unlevered deta of each division by
    each division's weight to get the equity beta for Petrochemical division. The cost of
    equity becomes 11.93% with a cost of debt of 6.01% (from table 1 and table 2). The
    WAAC for petrochemical calculates to 8.18%.

    Item Assumptions
    10 year treasury rate (Table 1) 4.66
    Spread to Treasury (Table 1) 1.35
    rD 6.01

    Unlevered Beta (calculation on right) 1.4087520949


    Debt/Equity 0.593
    Equity Beta 1.032650514
    Debt/Value 0.4
    Equity Value 78101.166
    Debt Value 52067.444
    D/E 0.6666666667
    Equity Beta 1.455474101
    rE (re = rf + B(EMRP)) 11.93737051 This was calculated by using the cost of equity formula.

    Income before taxes 30447


    Income tax expense 11747
    Tax rate (T) 0.3858179788 The numbers were taken from the income statement.

    number of shares outstanding 2951


    Current share price 44.11
    market value of equity 130168.61 Exhibit 4 shows the stock price and the shares outstanding

    Current portion of long term debt 26534


    long term debt 82414
    Value of debt 108948 Exhibit 2 is the balance sheet that contains the current lon

    Total (E+D) 239116.61 By adding the value of equity (market value) and total deb
    Percentage of equity 0.5443729317 Divided the equity portion by the total value.
    percentage of debt 0.4556270683 Divided the debt portion by the total value.

    WACC (rd(D/V)(1-t)+re((E/V)) 8.180207481 This was calculated by following the WACC formula.
    Asset EP RM P Midland Total
    Total (each) 140100 93829 28450 262379
    Weight 0.53396041604 0.35760865008 0.10843093388 1
    Unlevered Beta 0.8429 0.8763 1.408752095
    0.45007523468 0.31337246007 0.1527523053 0.9162

    y using the cost of equity formula.

    ken from the income statement.

    ock price and the shares outstanding.

    e sheet that contains the current long term debt and total long term debt values.

    equity (market value) and total debt, we find the total value of Midland.
    rtion by the total value.
    on by the total value.

    y following the WACC formula.

    You might also like