Pioneer Petroleum

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Pioneer Petroleum Corporation’s (PPC) has been through a diverse amount of changes throughout the years. They were originally were a merger of several different independent firms operating in the oil refining, pipeline transportation, and industrial chemicals fields. PPC then integrated vertically into exploration and production of crude oil and marketing refined petroleum products, but horizontally into plastics, agricultural chemicals, and real estate development. They decided to restructure the company into a hydrocarbons-based company, concentrating on oil, gas, coal, and petrochemicals. They needed to decrease their overall risk and optimize their overall performance and would only be able to by collaboration and coordination among…show more content…
With the economy and the market constantly fluctuating, the actual rate of return fluctuates with the market. The discounted rate gives a weighted average cost of capital (WACC) of 9% (Example 1). The divisions will ultimately affect the company and the WACC will fluctuate along with the divisional costs of capital. The risks involved within the divisions are reflected in the risks that the company overall chooses to invest. Example 1 WACC = rdebt(1-Tc)(D/V)+requity(E/V) =.12(1-.34).50+.10*.50 = .0896 = 9% The company has invested into many different industries and markets. Each industry’s risk is different and remaining diversified is crucial to obtaining a marginal rate of return. The company needs to use single corporate cost of capital hurdle rates in order to evaluate projects and in order to allocate costs. PPC has integrated so many different industries into their portfolio that it would be best for them to look at each division differently. Their oil division is going to have a higher risk compared to the plastics division. The divisions need to allocate costs according to the risk within that division. The multiple hurdle rates need to be determined to this risk. Pioneer needs to look to the future and determine how they want to compete in the long run. Though they need to use multiple hurdle rates they need to relate these to the company as a whole also. This is crucial in order to compete industry wide in the long

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