Preview

Midland Energy Resource Inc

Powerful Essays
Open Document
Open Document
2077 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Midland Energy Resource Inc
Midland Energy Resources, Inc.
Executive Summary

Midland Energy Resources was fortunate enough to have a skilled financial manager in Mortensen. Her expertise had come to be respected as was evidenced by her promotion and the reliance on her calculations. However, her cost of equity numbers were used as a starting point and manipulated rather than used as presented. Examining the calculation of the firms weighted average cost of capital and betas as well as comparing with others in the same type of industries indicates that assumptions should be changed for the project being analyzed. Consideration of debt, equity, and costs must be given for the specific project while being mindful of company strategy. Although projects may be evaluated differently, company directives should be followed. Midland Energy Resources was fortunate enough to have a skilled financial manager in Mortensen. Her expertise had come to be respected as was evidenced by her promotion and the reliance on her calculations. However, her cost of equity numbers were used as a starting point and manipulated rather than used as presented.Midland utilizes a four prong approach to financial and investment policies.
Deviation from strategy is not surprising given the volatility in production, pricing, and politics in overseas markets. When analyzing the proceeds from overseas projects,Midland converted proceeds to US dollars and used discount rates in US dollars instead of analyzing in the appropriate currency and converting the discount rate to the appropriate currency. Whether or not the project actually produced the earnings as evaluated is questionable.
Under the value-creating investment prong,some projects were considered as future equity cash flows using the cost of equity as the discount rate instead of the hurdle rate based on the project or divisional WACC. The calculation of EVA (economic value added) was manipulated by a “capital charge” and the “capital charge” was

You May Also Find These Documents Helpful

  • Powerful Essays

    The results of the analysis lend favourably towards accepting the investment project. First it is important to note that based on the after tax cost of borrowing and a risk premium of 3.75%, a discount rate of 8.89% was deemed appropriate for the project. The majority of the investment indicators used to value the project use discounted cash flows to determine the investment’s profitability. This technique allows for comparison amongst different investment opportunities available, as it provides the total return that is expected to be achieved over the project’s horizon in current dollar terms.…

    • 3248 Words
    • 13 Pages
    Powerful Essays
  • Powerful Essays

    Atlas Metal Company

    • 1487 Words
    • 6 Pages

    The purpose of this report is to help a financial special assistant, Linda, to analyze the financial position of Atlas Metals Company and deciding its capital budgeting and capital structure. Firstly, I explain why firm should use Net Present Value (NPV) methods for capital budgeting rather than Return on Investment (ROI) method and Payback Period method. Secondly, I calculate the Weighted Average Cost of Capital (WACC) which will be used as discount rate while calculating NPV. Then, I decide which rapid prototyping system company should invest as well as I compare the each expansion projects’ IRR with WACC to decide which projects should be invested and which should not. After deciding projects which should be accepted, I draw Investment Opportunity Schedule (IOS) and Marginal Cost of Capital (MCC) graphs to decide where the company should finance accepted projects.…

    • 1487 Words
    • 6 Pages
    Powerful Essays
  • Powerful Essays

    Shady Trail Case

    • 1383 Words
    • 6 Pages

    This paper serves as an evaluation of the Shady Trail property as described in the case “Shady Trail” provided by Harvard Business School. Shady Trail Distribution Center is an industrial property located in the West Dallas area. Lonestar Bank is interested in selling the property for $4 million. Part of the reason Lonestar wants to get rid of the property is to limit their exposure in real estate ventures, especially with the tough market conditions in Asia, Latin America, and North America as described. The recent volatile trend of the real estate markets is a bit too risky for the bank at the moment and they prefer to keep their hands clean. Holt Lunsford runs an in independent…

    • 1383 Words
    • 6 Pages
    Powerful Essays
  • Satisfactory Essays

    Myer Investment Analysis

    • 727 Words
    • 3 Pages

    Instructions: This assignment is to be completed by students working in groups, normally comprising two to four individuals. It is important that group members begin to meet and collect information about the chosen company early as possible. Groups are required to: · Assume that each member in your group is employed by Wealthy Funds management in the Analysis Division. The firm is considering a long-term investment in your chosen company and your group has been requested to analyse the company’s performance; 1…

    • 727 Words
    • 3 Pages
    Satisfactory Essays
  • Powerful Essays

    MW PETROLEUM

    • 1307 Words
    • 6 Pages

    In a case prepared by Barbara Wall at the Harvard Business School, entitled MW Petroleum…

    • 1307 Words
    • 6 Pages
    Powerful Essays
  • Powerful Essays

    Gitman, L. (2005). Principles of managerial finance, 11e. [University of Phoenix Custom Edition e-text]. Upper Saddle River, NJ: Prentice Hall. Retrieved May 8, 2009, from University of Phoenix, Finance for Decision Making FIN419 Course Web site…

    • 1615 Words
    • 7 Pages
    Powerful Essays
  • Powerful Essays

    In June 2003, Rob Venerus, director of the newly created Corporate Analysis & Planning group at The AES Corporation, thumbed through the five-inch stack of financial results from subsidiaries and considered the breadth and scale of AES. In the 12 years since it had gone public, AES had become a leading independent supplier of electricity in the world with more than $33 billion in assets stretched across 30 countries and 5 continents. Venerus now faced the daunting task of creating a methodology for calculating costs of capital for valuation and capital budgeting at AES businesses in diverse locations around the world. He would need more than his considerable daily dose of caffeine to point himself in the right direction. Much of AES’s expansion had taken place in developing markets where the unmet demand for energy far exceeded that of more developed countries. By 2000, the majority of AES revenues came from overseas operations; approximately one-third came from South America alone. Once a critical element in its recipe for success, the company’s international exposure hurt AES during the global economic downturn that began in late 2000. A confluence of factors including the devaluation of key South American currencies, adverse changes in energy regulatory environments, and declines in energy commodity prices conspired to weaken cash flow at AES subsidiaries and hinder the company’s ability to service subsidiary and parent-level debt. As earnings and cash distributions to the parent started to deteriorate, AES stock collapsed and its market capitalization fell nearly 95% from $28 billion in December 2000 to $1.6 billion just two years later. As one part of its response to the financial crisis, AES leadership created the Corporate Analysis & Planning group in order to address current and future strategic and financial challenges. To begin the process, the…

    • 8707 Words
    • 35 Pages
    Powerful Essays
  • Powerful Essays

    utilization of the debt capacity inherent to the industry, Midland also had unique ways to…

    • 1222 Words
    • 6 Pages
    Powerful Essays
  • Good Essays

    Calpine Corp

    • 1031 Words
    • 5 Pages

    Executive Summary: Calpine Corporation 's Senior Vice President of Finance (S.V.P.) Bob Kelly and Vice President (V.P.) of Finance Robin Crabtree knew 1999 was going to be a difficult year. Chief Executive Officer (C.E.O.) Pete Cartwright had recently announced a bold ramp-up in Calpine 's growth strategy, raising the 5-year target for generating capacity from 6,300 to 15,000 megawatts (MW). The financial requirements were formidable. Adding 12,000 MW to Calpine 's current 3,000 MW electric generating portfolio would mean building or acquiring 25 new electric power generating plants, Moreover, at a cost of roughly $500,000 per Megawatt (MW) for a BB rated company with total assets of only $1.7 billion and a debt-to-capitalization ratio of 79%, financing would not be easy. To get to 15,000 MW in five years, they needed to raise at least $4.5 billion from debt and equity markets assuming Calpine generated $1.5 billion of cash from operations as projected. In the near term, however, they needed to finance four merchant plants with a total capacity of 2,265 MW at a cost of $300 million each. We have analyzed the three options that Calpine has and looked at their pros and cons below to arrive at the conclusion.…

    • 1031 Words
    • 5 Pages
    Good Essays
  • Powerful Essays

    PFF Outcome2

    • 780 Words
    • 5 Pages

    I have been advised that any projects chosen should have an accounting rate of return at least 15% and company’s cost of capital is 10%. The cost of investment should be recovered within four years.…

    • 780 Words
    • 5 Pages
    Powerful Essays
  • Better Essays

    Victoria Chemicals

    • 3457 Words
    • 12 Pages

    This report contains two case studies in the discourse of Corporate Finance, more specifically capital investment strategy. The cases are applied on the fictional company Victoria Chemicals and are divided into (A): “The Merseyside Project and Victoria Chemicals” and (B): “The Merseyside and Rotterdam project”. The cases are picked from the book “Case Studies in Finance – managing for Corporate Value Creation” written by Robert. F. Bruner.…

    • 3457 Words
    • 12 Pages
    Better Essays
  • Powerful Essays

    LECTURES ON CORPORATE FINANCE - (Second Edition) © World Scientific Publishing Co. Pte. Ltd. http://www.worldscibooks.com/economics/6188.html…

    • 18661 Words
    • 75 Pages
    Powerful Essays
  • Powerful Essays

    The success or failure of an investment is due to several aspects, which need a clear analysis and understanding; these factors are: Identification of the risks, costumer’s aspiration and risk appetite. The success of the…

    • 3296 Words
    • 14 Pages
    Powerful Essays
  • Best Essays

    The finance profession has had difficulty in developing a practical approach to measuring risk premiums and thus investor’s required rate of return , but financial managers most often use a method called the capital asset pricing model (CAPM) .The capital asset pricing model (CAPM) is the standard risk-return model used by most academicians and practitioners. The important concept of CAPM is that investors are rewarded for only that portion of risk which is not diversifiable. This non-diversifiable risk is termed as beta, to which expected returns are linked. Problems can arise when using the CAPM to calculate a project-specific discount rate. For example, one common difficulty is finding suitable proxy betas, since proxy companies very rarely undertake only one business activity. The proxy beta for a proposed investment project must be disentangled from the company’s equity beta. One way to do this is to treat the equity beta as an average of the betas of several different areas of proxy company activity, weighted by the relative share of the proxy company market value arising from each activity. However, information about relative shares of proxy company market value may be quite difficult to obtain. A similar difficulty is that the ungearing of proxy company betas uses capital structure information that may not be readily available. Some companies have complex capital structures with many different sources of finance. Other companies may have debt that is not traded, or use complex sources of finance such as convertible bonds. The simplifying assumption that the beta of debt is zero will also lead to inaccuracy in the calculated value of the project-specific discount rate.…

    • 2381 Words
    • 8 Pages
    Best Essays
  • Good Essays

    Emirates

    • 375 Words
    • 2 Pages

    Fly Emirates is the largest provider of air transport in the Middle East, it also represents an…

    • 375 Words
    • 2 Pages
    Good Essays