Midland Energy Resources

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Midland Energy Resources, Inc.: Cost of Capital-Case Solution Ratings: (2)|Views: 995 |Likes: 3 Published by Rajesh Ranjan 1. Calculate Midland's corporate WACC. Clearly indicate your assumptions. Is Midland's choice of expected market risk premium appropriate? If not, what recommendation would you make and why? 2. Should Midland use a single corporate hurdle rate for evaluating investment opportunities in all of its divisions? Why or Why not? 3. Compute a separate cost of capital for E & P and Marketing & Refining divisions. Clearly explain your assumptions. What causes the cost of capital for each division to differ? (Use Hamada equation if needed) 4. How would you compute a cost of capital for the Petrochemical Division? 5. Run sensitivities on E&P using various degrees of leverage (from 30% to 60% D/V). What are the two biggest determinants or drivers of WACC for E&P? More info: Categories:Types, School Work Published by: Rajesh Ranjan on Oct 03, 2013 Copyright:Attribution Non-commercial List Price: $12.00 Buy Now Availability: Read on Scribd mobile: iPhone, iPad and Android. Flag for inappropriate content|Add to collection See less Midland Energy Resources, Inc. Rajesh Ranjan 1. Calculate Midland's corporate WACC. Clearly indicate your assumptions. IsMidland's choice of expected market risk premium appropriate? If not, whatrecommendation would you make and why? We think best estimate for market risk premium would be the average excess return (5.1%) for the longest period (1798-2006) as given in Exhibit 6 mainly because of lowest standard error.Midland has taken 5% as risk premium, which is very close t o 5.1%. Therefore Midland’s choice appears to be appropriate. 2. Should Midland use a single corporate hurdle rate for evaluating investmentopportunities in all of its divisions? Why or Why not? A firm may

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