Pioneer Petroleum

1222 Words5 Pages
Daniel Hughes FINA 450 MID TERM Pioneer Petroleum Corporation Case 2-27-13 Background: Formed in 1924 by a merger of several firms, Pioneer Petroleum Corporation (PPC) is in the business of refining oil, building pipeline transportation and creating industrial fields. Pioneer is currently one of the primary producers of crude oil in the United States and is one of the top producers of Alaska crude oil. PPC is currently the lowest cost refiner on the western side of the globe, and has been expanding capital investments in numerous countries. Pioneer began expanding beyond their current industry into several capital ventures. Some have included vertical investments through the production of crude oil to the marketing of refined…show more content…
The divisional-based cost of capital would be calculated similar to the way PPC estimated its original WACC, except it should factor in each division separately first. First, an estimate would be made of the usual debt and equity proportions for each separate division. Next, the cost of debt and equity for each division would be calculated in accordance with the concepts followed by PPC. The factors of debt and equity costs and would be combined to determine the WACC, or minimum acceptable rate of return for the NPV of each individual division. Using separate divisional rates would reflect the risks inherent in each separate division of the corporation. This would also help create a better benchmark of each division with their respective industries. III. Assuming that all projects within a division carry the same risk may lead to certain projects being accepted or rejected when they shouldn’t be. PPC should use the discounted rate for a project within a division based on how risky the project may be. A project with more risk than the industry risk associated with it will have a higher beta and will have a higher discount rate. Appropriately determining characteristics of a certain project can help the company determine the beta that needs to be used for a particular project to the industry. When looking at a certain division of PPC the capital budgeting criteria

More about Pioneer Petroleum

Open Document