Business and Management
Submitted By anhthang212
Midland Energy Resources was a global corporation specialising in oil and gas exploration and production (E&P), refining and marketing (R&M), and petrochemicals. Being one of the largest energy corporations in the world with a number of divisions, it is essential for the board of directors to calculate the company’s cost of capital accurately in order to apply it into several vital analyses of the corporation. This paper aims to estimate the corporate and divisional cost of capital for the next fiscal year and along with the estimations, several assumptions and arguments will be discussed to provide better overview and understanding of the whole process to the managers.
II. INTRODUCTION TO WEIGHT AVERAGE COST OF CAPITAL (WACC):
WACC is the weight average of the expected after-tax rates of return for all firm’s various sources of capital (Sheridan, 2011). In Midland, WACC is considered as the market-based weight average of the after-tax cost of debt and cost of equity:
Estimation of WACC was used in many researches and analyses within Midland, including asset appraisals for capital budgeting and financial accounting, stock repurchase decisions, performance assessments, and project valuations.
The above estimation of WACC requires the calculations of its three components: the cost of equity, the after-tax cost of debt and the firm’s target capital structure. Since changes in these above anticipated uses may affect the corporate target capital structure, various uses of WACC in corporate operations may relatively generate different results of WACC.
III. ESTIMATION OF MIDLAND CORPORATE WACC:
1. Cost of Equity:
It reflects the risk of cash flows to common equity holders who are the residual claimants of the firm’s earning. As the expected rate of return on a company’s stock is unobservable, thus the estimation has to rely on asset…...