Pioneer Petroleum Case Analysis Essay

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Pioneer Petroleum Cases Analysis The Problem: Pioneer Petroleum Corporation (PPC) has two major problems that are interfering with the goal of the firm to maximize shareholder wealth. The first is that PPC has been calculating their weighted average cost of capital incorrectly, by incorrectly calculating their after tax cost of debt and their cost of equity. This miscalculation has subjected PPC to more risk and has hurt the company’s ability to make appropriate investment decisions. This has also led PPC to accepting investment decisions that should not have been included within their acceptable range. Second, PPC has been using a single company-wide rate for their multi-divisional company. In either instance the company is not …show more content…

Analysis: Using a single cut-off rate for the entire company has increased the overall risk of their company. The use of an acceptable range based on a company-wide average cost of capital inappropriately leads the company to invest in divisions with high risk that should possibly have a higher required rate of return or to not invest in low risk divisions that would be profitable, merely because they do not exceed the company rate. Thus, using a WACC for each division will more accurately allow the corporation to decide which projects to accept and deny based on the specific risk factors of the section instead of the risk of the entire company which has been skewed because of diversification. Based on my calculations, the company wide WACC and cut off rate that should be used is 9.94% based on CAPM or 9.8% based on Dividend-growth, and any projects that are below that percentage should not be accepted for the company as a whole. Recommendations: Overall, I would recommend that PPC recalculate their WACC per each specific division and establish multiple cutoff rates instead of calculating a company wide WACC cutoff rate. This will benefit them the most in accepting and denying projects that will meet the appropriate cutoff rate that each division is susceptible to based off the specific risk each division must overcome. When recalculating their

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