Midland Energy Resources, Inc.

1205 Words Nov 3rd, 2011 5 Pages
Midland Energy
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Midland Energy Resources, Inc.
Cost of Capital
Table of Contents
I. Executive Summary
II. Introduction
III. Cost of Capital
IV. Risk & Tax Rate
V. Capital Structures
VI. WACC
VII. Conclusion
VIII. References
I. Executive Summary
Midland Energy Resources is a global energy company with operations in oil and gas exploration and production(E&P) providing a broad array of products and services to upstream oil and gas customers worldwide including refining and marketing (R&M), natural gas, and petrochemicals. Janet Mortensen, the senior vice president of project finance for Midland Energy Resources must determine the weighted average cost of capital (WACC) for the company as a whole and each of its divisions as part of the
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Cost of Equity is the return that stockholders require for a company. A company’s cost of equity represents the compensation that the market demands in exchange for owning the assets and bearing the risk of ownership. Based on capital markets the cost of equity varies in direct relation to the assumed risk in that specific market. The distinctive of the firm is the sensitivity to market risk (β) which depends on everything from management to its business and capital structure. Therefore past performances and present conditions have a direct effect on the overall value. Applying calculations at a divisional level allows specified markets to be analysis based on present market conditions for that service or product. The formula used to calculate Cost of Equity is:
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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 profit after taxes which