Midland: Cost and Equity Market Risk Essay

We determine the amount of capital financing needed by taking line (10), after-tax net income and adding back line (16) depreciation, to determine actual capital needed given the forecast of capital expenditure. We made certain assumptions, such as, cash levels will be kept roughly in line with 1983 level of $542 million. In addition, we assumed that tax provisions were actually paid out each year, rather than accruing a liability or deferring taxes to future dates. According to our assumptions and using the forecast we have determined that MCI needs approximately $4.2 billion dollars in the next 4 years, from 1984 through 1987. After 1987 capital expenditure begins to taper off and growth in EBITDA increases to a point where it is enough to finance internally the planned capital expenditures. Over 75% of the capital requirements comes in the later 2 years, in 1986 and 1987.

I do not think it is proper. Since hurdle rate is the key factor to determine whether we should accept a project, it is concerned with a specific investment opportunity belonging to a division. As we can see in Table 1, each of Midland`s divisions had its own target debt ratio. Those

Helen also goes on to explain that if one segment’s hurdle rate is lower than the corporate hurdle rate, the company would be destroying shareholder value. The whole is a sum of its parts. What if Teletech has the opportunity to invest in a project that creates value at a hurdle rate below the firm wide 10.41%, but above the segment’s hurdle rate? This investment would create value in this segment, but in the strategy of one hurdle rate, the project would be overlooked.

Barb Williams and Rick Thomas, while attending an executive education course at a well-known business school, came across a case which involved calculating the cost of capital for Telus Corporation (Telus). Basic data such as the Balance Sheet, Income Statement, Data on Telus’ Common Stock, Market Index, and the Average Annual Returns in North American Capital Markets were provided. In order to calculate Telus’ cost of capital we need to calculate the company’s Cost of Equity, Cost of Debt, and Tax Rate along with their weighted cost and then apply these to the Weighted

This course applies corporate finance concepts to make management decisions. Students learn methods to evaluate financial alternatives and create financial plans. Other topics include cash flows, business valuation, working capital, capital budgets, and long-term financing.

Solution – QUESTION 2 (written by Asher Curtis) - 10 Marks Suggestions only: 1. (3 marks for identifying the three dimensions) Applications of cost and equity differ on three dimensions. First, the treatment of dividends, is written against the investment account (Equity) or recognised as revenue (Cost). Second, the treatment of profits reported by the associated entity and the ammortisation of goodwill (the difference in the cost paid and the fair value of the net assets acquired) are not recognised when applying the cost method. The only case where net profit is not affected by choice of the method is where there is no goodwill (cost = fair value of net assets acquired) and the firm pays out all of its profit as dividends. Any of the following alternatives provide examples (2 marks for any of the following): a. The case for a profitable company that pays less than 100% profits out as dividends: The net value of the investment increases under the equity method, which will be more than cost unless the investment is revalued. b. The case for a loss company that pays no dividends: Unless the investment is subject to a recoverable amount test, application of the equity method

Assignment summary: You are taking the role of a security analyst who recently started following the Oil and Gas industry. The analyst has a task to draw a comparison of several financial indicators for two industry leaders: Exxon Mobil and Royal Dutch Shell, based on their income statements and balance sheets (attached at the end of this document) as well as the information from the notes to the financial

1. Please conduct a financial ratio analysis using the data in Exhibit 2. How do the results reflect different strategies pursued by the 4 firms?

Analyze the fundamental differences between the working capital structures and components for each chosen company, and speculate upon the main reasons why such differences exist.

Hurdle rates, the weighted cost of capital that projected cash flows must exceed for initiatives to be considered, vary within Marriott Corporations due to their unique industry risk levels and capital structures. They use this number to determine which projects to accept, to adjust the rate at which the firm grows and as a measure for compensation within each business area, and as incentive compensation.

Two managers attending an executive education course attempt to develop a cost of capital estimate for a leading telecommunications company, Telus The two managers are somewhat confused about the costs of various sources of capital, the calculation of the overall cost of capital and the appropriate use of the hurdle rate

in our calculations, as this company exhibited dramatic value differences to others in the sample, (likely to skew our results and prove misleading). Using the average of the revised sample field for each ratio, we inserted Torrington’s values where appropriate to generate an entity value. The findings generated two values for Torrington, 606 million and 398 million. Taking the average of these two numbers, Torrington exhibited a relative value of 502.41 million. Because of the lack of related information given in the case, and the often large differences in measures amongst competitors, different capital structures, internal management strategies, there remained many unknowns in our model. We decided it would be best to use this valuation to reaffirm our assumptions in our DCF valuation. (Please see exhibits)

Penn Oil Corporation has two divisions, Refining and Production. The company 's primary product is Luboil Oil. Each division 's costs are provided below:

At first, WACC and CAPM was attempted to be used as a source of cost of capital. However, for WACC, there is no available proportion of debt and cost of debt for MW. For CAPM, no available data seems to support the acceptable

Midland’s projected capital spending in refining and marketing would remain stable, without substantial growth in 2007 and 2008. Petrochemical capital spending was expected to near future and new investments would be undertaken by joint ventures outside the United States. Equity interest with foreign partners generally hovered at 50% for Midland’s foreign partners. Mortensen measured performance or business in two ways: (1). Performance was measured against plan over 1-, 3- and 5- years. (2). Measured based on economic value added (EVA) in which the company defined debt-free cash flows as net operating