The Financial Assignment

* She is considering the cash flow paid to all the equity or debt holders. So she cannot use the equity cost of capital.

The terminal growth rate is the average growth rates from 2007 to 2011. Combining with previous cash flows of 5 years, the whole future cash flows are:

I do not think it is proper. Since hurdle rate is the key factor to determine whether we should accept a project, it is concerned with a specific investment opportunity belonging to a division. As we can see in Table 1, each of Midland`s divisions had its own target debt ratio. Those

What is the correct capital structure and weighted average cost of capital for discounting the investment’s free cash flow?

Here, in the given pro forma in Exhibit 8, the cost of salt and other in 1984 was 1836 while that in 1983 is 1956. Thus, the growth rate is (1956-1836)/1836=6.6%.

Midland should not rely on a single corporate hurdle rate for evaluating investment opportunities across all divisions because each division is subject to fundamentally different forces such as political volatility, and high future expenditures. For example, R&E is expected to have capital expenditures in excess of $8 billion over the years 2007 and 2008 while worldwide refining capabilities are expected to decrease leading to possible investments in this division of Midland. The Exploration and Production division faces an entirely different set of challenges as oil reserves become more difficult to reach as in the case of arctic and deep water drilling operations, and consequently more expensive to exploit. In addition, political instability has become increasingly prevalent in investment considerations as oil production in areas such as the Middle East and Africa have grown. Civil and political upheaval in these regions threatens disruption of oil production and lead to greater volatility of prices (pg.2).

The approx. growth rate g is 0.30 (1+g)31 = 1.40 g ≈ 0.0509 ≈ 5.09%

• Cost of capital must reflect current capital market conditions (current required returns) • Cost of capital must also reflect the optimal relative proportions of debt and equity the firm will

The standard for terminal growth is normally GDP, or 3%. Given the maturity of this

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

In this assignment you will demonstrate your understanding of capital investment techniques by evaluating the following three case studies.

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

Then, we can get growth rates of 2007 -2011 are 2.46%, 1.76%, 4.09%, 3.61% and 2.78% respectively. Finally, we take the average growth rate of 2.94% as long-term growth rate. The computation is showed in Exhibit 2($ in thousands).

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:

* Please choose either the CAPM estimate or the DDM estimate for cost of equity based on your answer to Question 3.