Pioneer Petroleum 1 
TO: VEFA TARHAN, SPECIAL TOPICS IN FINANCE
FROM: MAHMUT MACIT, AHMET ARDA ATIK, CAN KORKMAZ
DATE: NOVEMBER 4, 2014
CASE: PIONEER PETROLEUM CORPORATION
Overview of the Company
Pioneer Petroleum Corporation established in 1924 and operating in oil refining, pipeline transportation, and industrial chemical fields. Company uses weighted-average cost of capital (WACC) as a discount rate to discount future cash flows that generate from possible projects. According to net present values of these possible projects management decides to invest or not. WACC represents the minimum rate of return from the investments to satisfy both debt-holders (bondholders) and shareholders. Since these investments are forward-looking, company should calculate weights according to market values not with book values. For the shareholders’ perspective, cost of capital measures the rate that the investors expect from the company and it depends on how they value the company’s securities and that value depends on the future profits and cash flows, not on accounting history. For the debt-holders’ perspective, company would need to raise new capital to finance the new projects and investments and it should be in market terms. Also same for bondholders, they expect a return based on market values of their securities since company should definitely weights cost of equity and cost of debt in market values for the WACC calculation.
Likewise the reasons for market value weights, company should use target capital structure for its WACC. Investors go into long term projects in order to get benefit from future cash flows and they determine their required rate of return by considering firm’s targeted capital structure. In most cases, current capital structure may not reflect the level expected to prevail over the life of business.
WACC of Pioneer Petroleum
Company uses two alternative approaches to calculate its WACC. First one is a single cut-off rate, which represents the firm-wide WACC. The second one
FROM: MAHMUT MACIT, AHMET ARDA ATIK, CAN KORKMAZ
DATE: NOVEMBER 4, 2014
CASE: PIONEER PETROLEUM CORPORATION
Overview of the Company
Pioneer Petroleum Corporation established in 1924 and operating in oil refining, pipeline transportation, and industrial chemical fields. Company uses weighted-average cost of capital (WACC) as a discount rate to discount future cash flows that generate from possible projects. According to net present values of these possible projects management decides to invest or not. WACC represents the minimum rate of return from the investments to satisfy both debt-holders (bondholders) and shareholders. Since these investments are forward-looking, company should calculate weights according to market values not with book values. For the shareholders’ perspective, cost of capital measures the rate that the investors expect from the company and it depends on how they value the company’s securities and that value depends on the future profits and cash flows, not on accounting history. For the debt-holders’ perspective, company would need to raise new capital to finance the new projects and investments and it should be in market terms. Also same for bondholders, they expect a return based on market values of their securities since company should definitely weights cost of equity and cost of debt in market values for the WACC calculation.
Likewise the reasons for market value weights, company should use target capital structure for its WACC. Investors go into long term projects in order to get benefit from future cash flows and they determine their required rate of return by considering firm’s targeted capital structure. In most cases, current capital structure may not reflect the level expected to prevail over the life of business.
WACC of Pioneer Petroleum
Company uses two alternative approaches to calculate its WACC. First one is a single cut-off rate, which represents the firm-wide WACC. The second one