Midland Questions

 Midland Inquiries Essay

 Professor Cruz

Midland Strength Resources, Inc.: Cost of Capital

Case Questions

This case offers an opportunity to know what cost of capital firms should use once firms are evaluating expenditure opportunities. The situation addresses what inputs ought to be used in price the opportunity expense of capital for investors along with which companies should be referred to as comparables.

1 . How are Mortensen's estimates of Midland's cost of capital used? Just how, if at all, should these anticipated uses affect the calculations?

2 . Calculate Midland's corporate WACC. Be prepared to defend your specific assumptions about the many inputs towards the calculations. Is definitely Midland's range of equity industry risk high grade appropriate? If not, what recommendations might you make and why?

a few. Should Midland use a single corporate difficulty rate for evaluating purchase opportunities in all of it is divisions? How come or why not? Shouln't. Based on a divisions, every containing its unique group of risks 5. Compute a different cost of capital for the Exploration and Production (E& P) plus the Marketing and Refining (M& R) divisions. What causes them to vary from one another?; 44=

5. How would you figure out a cost of capital for the Petrochemical division?

installment payments on your From Desk 1

To get consolidated:

D/V= 42. 2%

E/V = 1 – D/V =57. 8%

Suppose the tax rate is the average price generated by year 2004, 2005 and 2006 (from Exhibit 1) 2004 7, 414/17, 910 = forty one. 40%

june 2006 12, 830/32, 723 = 39. 21%

2006 eleven, 747/30, 447 = 38. 58%

to =(41. 40%+39. 21%+38. 58%)/3=39. 73%

+ propagate to treasury = some. 98%+1. 62%=6. 6%

sama dengan 4. 98%+1. 25×5% = 11. 23%

WACC =6. 6%×42. 2%×(1-39. 73%) +11. 23%×57. 8% = 8. 17%

4. E& P

D/V = 46. 0%

E/V = 54. 0%

zero. 93

] sama dengan 0. 93*[1+ (1-39. 73%)* sama dengan 1 . forty one

= 4. 98%+1. 41×5% = doze. 03%

& spread to treasury sama dengan 4. 98%+1. 60% = 6. 58%

WACC =6. 58%×46%×(1-39. 73%) +12. 03%×54% = almost eight. 32%

R& Meters

D/V = 31%

E/V = 69%

1 . 05

] = 1 . 07*[1+ (1-39. 73%)* = 1 ) 33

sama dengan 4. 98%+1. 33×5%...

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