Pioneer Petroleum

Evaluating the risks, calculating the probability of success, and factoring in the projected profit from sales will provide a clearer NPV to be compared with other projects in the

Mortensen’s cost of capital estimates are used for a variety of purposes at both the divisional and corporate levels. Examples include internal analyses such as financial accounting, performance assessment and capital budgeting, while others are used for strategic planning purposes such as merger and acquisition, as well as stock repurchase decisions (Luehrman and Heilprin, 2009, pg.1). When used at the divisional rather than corporate level, special consideration should be given to the fact that Midland’s divisions are not publicly traded entities, and therefore do not have individual Beta

a) Discounted cash flows from the projects by the suitable division of a hurdle rate to get the net present value which financially makes sense since risks among different divisions do vary.

The mixture of debt-equity mix is important so as to maximize the stock price of the Costco. However, it will be significant to consider the Weighted Average Cost of Capital (WACC) as well so that it can evaluate the company targeted capital structure. Cost of capital (OC) may be used by the companies as for long term decision making, so industries that faced to take the important of Cost of capital seriously may not make the right choice by choosing the right project(Gitman’s, ).

1. Determine the Weighted Average Cost of Capital (WACC) based on using retained earnings in the capital structure.

a. What risk-free rate and risk premium did you use in calculating the cost of equity for each division? Why did you choose these numbers?

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

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.

Moreover, let’s calculate the Weighted Average Cost of Capital (WACC). And in order to calculate it we need to know the capital structure of the company. Knowing the capital structure of the

• Compute a separate cost of capital (WACC) for the lodging business, contract services business and restaurant business.

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:

Pacific Oil Company is a Sweetwater Oil company of Oklahoma City, Oklahoma. It was founded in 1902. One of the major chemical lines of Pacific's is the production of vinyl chloride monomer (VCM).

Union Oil Company of California (Unocal) is a California-based oil company founded in October 17, 1890. Unocal is to expand oil field in California. However, in the 1990, the oil field in the States nearing dry out, the company had started to invest in energy resources projects outside the US.

1. Do you agree or disagree with Tony Hayward’s quote at the end of the case? Was this disaster strictly a BP failure or an industry accident? (One of my biggest mistakes was that I allowed myself to become the lightning rod for hatred and anger.” He went on to say, “I genuinely feel that this could have happened to anyone. This is not BP. It is an industry accident.)

Apache Corporation, an independent oil and gas exploration and production company founded in 1954 by Raymond Plank whose primary focus was to profit in oil. Their initial investor 's capital of $250,000 in 1954 rose to over a billion dollars in acquisitions by 2001. Acquisitions over a billion included Repsol in Egypt’s Western desert and a