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Midland Case

 Midland Circumstance Essay Midland Circumstance Essay

Midland's cost of capital

1 . I choose the speed of 30-year U. H. Treasury a genuine in 2007 (4. 98%) as the chance free charge in the 3 years ago WACC computations. The reason is that majority of large businesses and monetary analysts record using long-term yields intended for bonds to determine the risk-free charge. Rf=0. 0498 2 . Cost of debt, which is determined by adding the distributed to Treasury (1. 62%) to the charge of 30-year treasury a genuine in 3 years ago. Rd=0. 0498+0. 0162=0. 066 3. Cost of equity, the EMRP (5%) and D/E (59. 3%) was taken out of the context of the case. βa=Equity Beta/(1+D/E)= 1 . 25/(1+0. 593)= 0. 78

According to Table1, consolidated D/V is usually 42. 2%, E/V is usually 57. 8%, βe= βa*(1+D/E)= 0. 78*(1+0. 422/0. 578)=1. 35

Re=Rf+ βe *EMRP= 0. 0498+(1. 35*0. 05)= 0. 1173

4. WACC, the tax rate (38. 58%) was from the 2006 taxes paid. WACC= D/V*(1-T)*Rd+E/V*Re= 0. 422*(1-0. 3858)*0. 066+0. 578*0. 1173=8. 49% The division costs of capital

Exploration & Production

1 . We also use of 30-year U. S. Treasury bonds in 2007 (4. 98%) because the risk totally free rate, Rf=0. 0498. 2 . Cost of financial debt, Rd=Rf+ the spread to Treasury(Exploration & Production)=0. 0498+0. 016=0. 0658 3. Expense of equity, EMRP=5%. Since we all can't get the beta of E& P, we should make use of the information of comparable businesses on Exhibit 5 to get typical asset beta, and then to calculate the beta of E& L. βa=Equity Beta/(1+D/E)= 1 . 15/(1+0. 398)= zero. 82

In accordance to Table1, consolidated D/V is 46%, E/V is 54%,

βe= βa*(1+D/E)= zero. 82*(1+0. 46/0. 54)=1. 52

Re=Rf+ βe *EMRP= zero. 0498+(1. 52*0. 05)= 0. 1258

some. T=38. 58%

WACC= D/V*(1-T)*Rd+E/V*Re= 0. 46*(1-0. 3858)*0. 0658+0. 56*0. 1258=8. 9% Refining & Advertising (same with Exploration & Production) 1 ) Rf=0. 0498

2 . Expense of debt, Rd=Rf+ the distributed to Treasury(Refining & Marketing)=0. 0498+0. 018=0. 0678 a few. Cost of collateral, EMRP=5%.

βa=Equity Beta/(1+D/E)= 1 . 2/(1+0. 203)= 0. 998

According to Table1, consolidated D/V is usually 31%, E/V is 69%,

βe= βa*(1+D/E)= 0. 998*(1+0. 31/0. 69)=1. 45

Re=Rf+ βe *EMRP=...