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Midland Case

Midland Case. Team 1 Jacob Bills Kari Kraus Marcus Ravisankar Gurusamy. Midland Company Introduction. Midland Energy Resources: a global energy company with operations in Oil and Gas Exploration (E&P)

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Midland Case

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  1. Midland Case Team 1 Jacob Bills Kari Kraus Marcus Ravisankar Gurusamy

  2. Midland Company Introduction • Midland Energy Resources: a global energy company with operations in • Oil and Gas Exploration (E&P) • searching for potential underground or underwater oil and gas fields, drilling of exploratory wells, and subsequently operating the wells that recover and bring the crude oil and/or raw natural gas to the surface. • Refining & Marketing (R&M) • Gasoline and base-stock lubricants • Petrochemicals • Polyethylene, polypropylene, styrene, olefins, aromatics, and fuel and lubricant additives

  3. Current Problem • One set of Corporate and divisional cost of capital values published by Ms. Mortensen are utilized for multiple purposes such as: • Capital budgeting and Financial accounting • Performance assessments • Merger & Acquisition proposals • Stock-repurchase decisions • Cost of Capital Estimates by Ms. Mortensen were often criticized and challenged (for assumptions and inputs) by division presidents and controllers • Ms. Mortensen identified the need for a ‘user’s guide’ to interpret and use the cost of capital estimates appropriately to address the above issues

  4. Risk-Free Rate

  5. Equity Market Risk Premium

  6. Equity Beta for the Company

  7. Cost of Equity for the Company

  8. Debt Beta for the Company

  9. Cost of Debt for the Company

  10. Cost of Capital for the Company

  11. Weights for the cost of capital for the Exploration & Production Division

  12. Equity Beta for the Exploration & Production Division

  13. Cost of Equity for the Exploration & Production Division

  14. Debt Beta for the Exploration & Production Division

  15. Cost of Debt for the Exploration & Production Division

  16. Cost of Capital for the Exploration & Production Division

  17. Issues with case data • No strong rationale presented for why some overseas projects were analyzed based on cost of equity (vs WACC) • If the corporate investments in these overseas projects were specifically made from equity only, then this makes sense

  18. Backup Slides

  19. Equity Market Risk Premium • From StockVal on April 10, 2007 • EMRP in Y-axis; 2006 range >4% to ~5%, supports the 5% used by Midland in 2006 • Years 1972 – 2007 in X-axis http://www.drkash.com/site/index.php?option=com_docman&task=doc_view&gid=274

  20. Presentation Requirements • Company Presentation Instructions: You will prepare a PowerPoint presentation. Each member must play some role in relaying the data of the case as this is part of your overall assignments grade. You will start with a brief introduction of the company and the current problem Ms. Mortensen is facing. Please use spreadsheet solutions to show how you arrived at calculations. You should address each of the questions in the case, numbered 1-7. You are tasked to cover only the company cost of capital and not any divisional costs. You should also answer the 2nd of the in-class discussion questions.

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