Our well log and completion data covers early drilling from 1920 up to the latest information available from Drilling Info. In the end ,we arrived at 8. Therefore, if we use the 30 year treasury rate it would not be appropriate since the changes that are taking in the industry rapidly in the timeframe which the company cannot model and capture in its business. However, before calculating the cost of equity the new levered beta according to the new target capital structure has been calculated. The case uses comparable companies to estimate asset betas for each operating division, and employs the Capital Asset Pricing Model to determine the cost of equity.
Initially, unlevered beta had been calculated to eliminate the financial effect that amounts to 0. The levered beta of 1. Midland Energy is divided into three divisions: Exploration and Production, Refining and Marketing, and Petrochemicals. In contrast, some assets—notably cash and marketable securities— may represent excess liquidity and should be netted against debt before the ratios are computed. The cost of debt for the company is 4. The table 1 provided in the case provides us with the target capital structure. The master budget is the aggregation of all lower level budget produced by a company's various functional areas and, also includes budgeted financial statement, a cash forecast, and a financing plan.
Case Analysis: The report contains a detailed analysis of the capital structure of the company and its three divisions. The beta equity of Midland is 1. Risk premiums for these three divisions are different. Mortensen and her team used betas published in commercially available databased, according to Exhibit 5, equity beta for Midland is 1. So the method is to look for the list of comparable public companies, and to take arithmetic average of the betas. Those companies should have good profit margin and about 40% to 50% debt ratio.
How should attribute divisional weights? Midland Energy Library has unique and rare data for the Permian Basin and South-eastern New Mexico. Midland works with a number of experienced vendors and partners, including Bond-Coat Inc. Our core business is to market the 6kg, 13kg and 50kg cylinders at the most competitive prices. We also arrange delivery to client locations using fully fledged transport fleet. However, her cost of equity numbers were used as a starting point and manipulated rather than used as presented. Some of the clear differences among all the three divisions are that the exploration and the production division has the highest demand for the future capital expenditure requirement as shown in exhibit 3 and the return on investment percentage of 54.
Bulent Aybar Treasury Yields and Division Cost of Debt Maturity Rate: 1-Year 4. Our clients are spread across the country from Mombasa to Nairobi cities to Meru, Embu, Machakos, Gilgil, Kitui, Bomet, Kitale and Kakamega, Isiolo and Bungoma. Check back regularly to keep up to date on drilling in Texas. . Put our database to work for you! Due to different business nature discussed above, investors are seeking more returns for division which is more risky. Its financial strategy in 2007 is based on four pillars and those are given below.
The beta is higher as compared to the current beta equity of the company because the gearing risk is lower in the base case. As the uncertainty in the industry is increasing and the investors want more return to compensate them for the increased return, therefore, it would be more appropriate for the company to use a market risk premium of 6%. Don't forget to update your application each semester! It has targets to raise the debt and changes its gearing ratio to 42. Their point estimate for 2007 is 5. In a word, our team think that 5% is a reasonable market risk premium.
. Divisions Exploration and Production Refining and Marketing Petrochemicals Janet Mortensen Global Energy Strategy 4 Pillars of 2007 Financial Strategy Fund significant overseas growth Invest in value-creating projects across all divisions Optimize its capital structure; Opportunistically repurchase undervalued shares. Bulent Aybar What Maturity for Risk Free Rate? All of these divisions have different capital structures and operate in different respective industries. Cost of Capital Table of Contents I. Capital budgeting at Midland is done using discounted cash flow method and weighted average cost of capital rwacc. Presented By: Whitney Pence, Edward Wallace, Fernando Mangones, Robert Rielly, and Patrick Sittenauer Company Overview Global Energy Company Three Divisions Janet Mortensen, Sr.