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Midland Energy F13 PDF
Midland Energy F13 PDF
Cost of Capital
Maturity Rate:
1-Year 4.54%
10-Year 4.66%
30-Year 4.98%
Spread over
Business Segment: Credit Rating Debt/Value Treasury
Consolidated A+ 42.20% 1.62%
Exploration &
Production A+ 46.00% 1.60%
Refining & Marketing BBB 31.00% 1.80%
Petrochemicals AA- 40.00% 1.35%
Cost of Debt for E&P Division
Spread
Credit Debt/ to
Rating Value Treasury
Business Segment:
Consolidated A+ 42.2% 1.62%
Since the 10 year Treasury note yield is given as 4.66%, the cost
of debt for E&P division is:
Rd= Rf+CRS
Rd= 4.66%+1.60% =0.0626 or 6.26%
Cost of Equity: EMRP
D E
b asset b debt b equity
DE DE
• Since interest on debt is deducted by the company to arrive
at taxable income, the claim that creditors have on the
company ’s assets does not cost the company the full amount
but rather the after - tax claim; the burden of debt financing
is actually less due to interest deductibility.
© Dr. C. Bulent Aybar
Asset Beta and Equity Beta
1
b asset b equity
1 (1 t )( D / E )
Credit Cost of
Spread Debt
Exploration &
Production: 1.60% 6.26%
Refining & Marketing: 1.80% 6.46%
Petrochemicals 1.35% 6.01%
Asset Earnings
D/E Equity Beta Beta %
Consolidated 59.30% 1.25 0.92 100.00%
Exploration & Production: 85.19% 1.41 0.93 67.14%
Refining & Marketing: 44.93% 1.33 1.05 21.64%
Petrochemicals 66.67% 0.85 0.61 11.21%
Exploration & Production 85.2% 1.41 0.93 22,357 12,556 53.4% 0.93
Refining &
Marketing 44.9% 1.33 1.05 202,971 4,047 35.8% 1.05
Petrochemicals 66.7% 0.64 0.46 23,189 2,097 10.8% 0.46
Divisional WACC
Exploration & Production 85.2% 46.0% 0.93 1.41 11.71% 6.26% 8.05%
Refining & Marketing 44.9% 31.0% 1.05 1.33 11.32% 6.46% 9.01%
Petrochemicals 66.7% 40.0% 0.46 0.64 7.85% 6.01% 6.16%
Using a single WACC in all divisions may have two problematic implications:
1) Company invests in projects that appear positive NPV, but this happens
because discount rate is set too low, in reality these projects have negative
NPV (Type-1 errors)
2) Company rejects good projects, because WACC is set too high (Type-2 errors)
In both cases, firm underperforms.