Calculate Midland’s corporate WACC.

Explain your specific assumptions about the various inputs to the calculation

rd(D/V)(1-t)+re((E/V)
Item Assumptions
10 year treasury rate (Table 1) 4.66
Spread to Treasury (Table 1) 1.62
rD 6.28 This was calculated from the 10-year rate table plus the spread

Equity Beta (Exhibit 5) 1.25

Debt/Equity 0.593
Unlevered Beta 0.916281259
Debt/Value 0.422
Equity Value 75237.45658
Debt Value 54931.15342
D/E 0.7301038062
Equity Beta 1.327157015
rE (re = rf + B(EMRP)) 11.29578507 This was calculated by using the cost of equity formula.

Income before taxes 30447

Income tax expense 11747
Tax rate (T) 0.3858179788 The numbers were taken from the income statement.

number of shares outstanding 2951

Current share price 44.11
market value of equity 130168.61 Exhibit 4 shows the stock price and the shares outstanding.

Current portion of long term debt 26534

long term debt 82414
Value of debt 108948 Exhibit 2 is the balance sheet that contains the current long term

Total (E+D) 239116.61 By adding the value of equity (market value) and total debt, we find
Percentage of equity 0.5443729317 Divided the equity portion by the total value.
percentage of debt 0.4556270683 Divided the debt portion by the total value.

WACC (rd(D/V)(1-t)+re((E/V)) 7.906501985 This was calculated by following the WACC formula.
 the various inputs to the calculations

10-year rate table plus the spread

the cost of equity formula.

m the income statement.

ce and the shares outstanding.

t that contains the current long term debt and total long term debt values.

(market value) and total debt, we find the total value of Midland.
the total value.
e total value.

ng the WACC formula.

Should Midland use a single corporate hurdle rate for evaluating investment opportunities in all of its divisions? Why

Because Midland is comprised of different divisions with different financials and risk, it's more appropriate
use different rates within each of its divisions. Doing so will better reflect the risks and profits of each divis
differ from each other and have different risks. It will also allow Midland to gauge how each division based
each respective industry compared to competitors.
es in all of its divisions? Why or why not?

risk, it's more appropriate for Midland to

s and profits of each divison which
how each division based on factors in
Compute a separate cost of capital for the E&P and Marketing & Refining divisions. What causes them to differ from

better sense of the exploreation and production market. This led to a cost of equity of 11.08% and a cost of
the exploreation and production division. Doing the same for the refining and marketing division, we cacula

Exploration and Production Division

10 year treasury rate (Table 1) 4.66

Spread to Treasury (Table 1) 1.6
rD 6.26 This was calculated from the 10-year rate table plus the spread

Equity Beta (Exhibit 5) 1.15

Debt/Equity 0.593
Unlevered Beta 0.8429787582
Debt/Value 0.46
Equity Value 70291.0494
Debt Value 59877.5606
D/E 0.8518518519
Equity Beta 1.284018578
rE (re = rf + B(EMRP)) 11.08009289 This was calculated by using the cost of equity formula.

Income before taxes 30447

Income tax expense 11747
Tax rate (T) 0.3858179788 The numbers were taken from the income statement.

number of shares outstanding 2951

Current share price 44.11
market value of equity 130168.61 Exhibit 4 shows the stock price and the shares outstanding.

Current portion of long term debt 26534

long term debt 82414
Value of debt 108948 Exhibit 2 is the balance sheet that contains the current long term d

Total (E+D) 239116.61 By adding the value of equity (market value) and total debt, we fin
Percentage of equity 0.5443729317 Divided the equity portion by the total value.
percentage of debt 0.4556270683 Divided the debt portion by the total value.

WACC (rd(D/V)(1-t)+re((E/V)) 7.783488241 This was calculated by following the WACC formula.

Refining and Marketing Division

10 year treasury rate (Table 1) 4.66
Spread to Treasury (Table 1) 1.8
rD 6.46 This was calculated from the 10-year rate table plus the spread

Equity Beta (Exhibit 5) 1.2

Debt/Equity 0.593
Unlevered Beta 0.8796300086
Debt/Value 0.31
Equity Value 89816.3409
Debt Value 40352.2691
D/E 0.4492753623
Equity Beta 1.122352342
rE (re = rf + B(EMRP)) 10.27176171 This was calculated by using the cost of equity formula.

Income before taxes 30447

Income tax expense 11747
Tax rate (T) 0.3858179788 The numbers were taken from the income statement.

number of shares outstanding 2951

Current share price 44.11
market value of equity 130168.61 Exhibit 4 shows the stock price and the shares outstanding.

Current portion of long term debt 26534

long term debt 82414
Value of debt 108948 Exhibit 2 is the balance sheet that contains the current long term d

Total (E+D) 239116.61 By adding the value of equity (market value) and total debt, we fin
Percentage of equity 0.5443729317 Divided the equity portion by the total value.
percentage of debt 0.4556270683 Divided the debt portion by the total value.

WACC (rd(D/V)(1-t)+re((E/V)) 7.399422218 This was calculated by following the WACC formula.
 causes them to differ from one another?

of 11.08% and a cost of debt of 6.26% in

eting division, we caculated a cost of

rate table plus the spread

of equity formula.

ome statement.

e shares outstanding.

ins the current long term debt and total long term debt values.

alue) and total debt, we find the total value of Midland.

WACC formula.
rate table plus the spread

of equity formula.

ome statement.

e shares outstanding.

ins the current long term debt and total long term debt values.

alue) and total debt, we find the total value of Midland.

WACC formula.
How would you compute a cost of capital for the Petrochemical division?

To find the unlevered beta of petrochemical division, we must get the weights of
each division using Exhibit 3 and multiplying the unlevered deta of each division by
each division's weight to get the equity beta for Petrochemical division. The cost of
equity becomes 11.93% with a cost of debt of 6.01% (from table 1 and table 2). The
WAAC for petrochemical calculates to 8.18%.

Item Assumptions
10 year treasury rate (Table 1) 4.66
Spread to Treasury (Table 1) 1.35
rD 6.01

Unlevered Beta (calculation on right) 1.4087520949

Debt/Equity 0.593
Equity Beta 1.032650514
Debt/Value 0.4
Equity Value 78101.166
Debt Value 52067.444
D/E 0.6666666667
Equity Beta 1.455474101
rE (re = rf + B(EMRP)) 11.93737051 This was calculated by using the cost of equity formula.

Income before taxes 30447

Income tax expense 11747
Tax rate (T) 0.3858179788 The numbers were taken from the income statement.

number of shares outstanding 2951

Current share price 44.11
market value of equity 130168.61 Exhibit 4 shows the stock price and the shares outstanding

Current portion of long term debt 26534

long term debt 82414
Value of debt 108948 Exhibit 2 is the balance sheet that contains the current lon

Total (E+D) 239116.61 By adding the value of equity (market value) and total deb
Percentage of equity 0.5443729317 Divided the equity portion by the total value.
percentage of debt 0.4556270683 Divided the debt portion by the total value.

WACC (rd(D/V)(1-t)+re((E/V)) 8.180207481 This was calculated by following the WACC formula.
 Asset EP RM P Midland Total
Total (each) 140100 93829 28450 262379
Weight 0.53396041604 0.35760865008 0.10843093388 1
Unlevered Beta 0.8429 0.8763 1.408752095
0.45007523468 0.31337246007 0.1527523053 0.9162

y using the cost of equity formula.

ken from the income statement.

ock price and the shares outstanding.

e sheet that contains the current long term debt and total long term debt values.

equity (market value) and total debt, we find the total value of Midland.
rtion by the total value.
on by the total value.

y following the WACC formula.