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Midland Energy Case Analysis

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Midland Energy Resource Case Analysis

1. Describe Midland, its capital planning model and Janet Mortensen's role in the case.
Midland Energy Resource, Inc. has three major divisions: Exploration & Production (E&P), Refining and Market (R&M), and Petrochemicals. E&P division provides the most profit for Midland. R&M is the largest division in Midland by revenue. Petrochemicals is the smallest division in Midland. Midland’s financial strategy in 2007 consisted of four principals: funding significant overseas growth, investing in value-creating projects, optimizing corporate capital structure, and repurchasing undervalue shares.
Janet Mortensen, senior analyst reporting to CFO, takes role of estimating Midland’s cost of capital for various analyses, both corporate and division level, throughout the company. Her main method is using Weighted Average Cost of Capital (WACC) formula to evaluate required Cost of Capital estimate. 2. Briefly explain the meaning of the following concepts: cost of capital, WACC, and CAPM.
Cost of Capital: the minimum acceptable rate of return for new investments in the corporation. The opportunity cost of investing.
WACC: Weighted Average Cost of Capital, a calculation of company’s cost of capital, which is seemed as composite cost of debt and equity. Every category of capital in WACC is proportionally weighted.
CAPM: Capital Asset Pricing Model, a theory representing the financial market behavior. Used to estimate the cost of equity. 3. Address what you use “cost of capital” to evaluate. How are Mortensen’s estimates used at Midland?
I would use cost of capital to evaluate new projects/investments of the company. Since cost of capital represents the minimum rate of return, a project/investment would be consider worthwhile if the expected rate of return is greater than cost of capital.
Mortensen’s…...

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