Midland Energy Resources Essay

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Case study: Midland Energy Resources, Inc. Company Background: Midland Energy Resources, Inc. (Midland) has a history of more than 120 years. There are three main business segments within the company: Exploration & Production, Refining & Marketing and Petrochemicals. Objectives: In this report, I am going to estimate and calculate the cost of capital for Midland and each of its three divisions. Assumptions: 1. CAPM Model is used in calculating re. Since we chose CAPM model to calculate re, then the assumptions of the CAPM Model have to be followed correspondingly. (Some important assumptions of the CAPM Model: 1) Investors are rational and risk-averse 2) Investors are price takers 3) There is no transaction or taxation costs 4) Investors may lend and borrow unlimited amounts using the risk free rate 5) Investors have the same information at the same time, etc. 2. rd and re remain constant for Midland and each of its three divisions For simplicity, I assume rd and re remain constant. 3. Tax rate remains constant. 4. D/V remains constant. 5. β remains constant 6. US Treasury bonds are risk-free and the rates are constant for each maturity. Although US Treasury bonds might not be free of risk in reality, I assume they are free of risk in this report for simplicity, which is in fact a commonly used assumption. I also assume that the T-bond rates remain constant for each different maturity. 7. Costs of capital to be calculated are effective in project evaluation in 2007 only. They cannot be used in evaluation after 2007. This is to help guarantee projects are accurately elevated based on the most current data provided. 8. There are other assumptions which will be mentioned later in the Calculation and Analysis part. Calculation and Analysis: To calculate the cost of capital for Midland and each of its three business segments, the

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