The Cost Of Capital Is Calculated For Midland On A Firm...

Executive Summary The cost of capital is calculated for Midland on a firm-wide and divisional level in this paper. On a divisional level, asset betas of 0.9325 and 1.0490 are calculated for EP and RM respectively based on comparable firms. The asset beta for PC is back-calculated based on a formula relating the divisional betas to the firm-wide beta, thus resulting in 0.4517. Divisional betas are re-levered at target D/E ratios as provided in the case and the resulting costs of equity (using a simple CAPM) are 11.25%, 12.32%, 7.89% while the resulting WACCs are 7.81%, 9.71%, 6.18% for EP, RM and PC respectively. On a firm-wide level, the resulting cost of equity is found to be 11.30% and the WACC is 8.50%. 1. Introduction Midland Energy Resources, Inc. (hereafter Midland) is an energy company with global operations in three main lines of business: oil and gas exploration and production (EP), refining and marketing (RM) and petrochemicals (PC). The divisions have different weights in terms of asset bases and revenues as well as different asset betas. EP is the most profitable business of Midland with margins among the highest in the industry. It has an asset base of $140bn and it generated revenues and earnings amounting to $22.4bn and $12.6bn respectively in 2006. RM is the largest division of Midland. It is a low-margin commoditized-products division and it has assets worth approx. $94bn and it generated revenues and earnings of $203bn and $4bn respectively. Lastly,Show MoreRelatedMidland Energy Resource Inc2068 Words   |  9 PagesMidland Energy Resources, Inc. Executive Summary Midland Energy Resources was fortunate enough to have a skilled financial manager in Mortensen. Her expertise had come to be respected as was evidenced by her promotion and the reliance on her calculations. However, her cost of equity numbers were used as a starting point and manipulated rather than used as presented. 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