Midland Energy

Case Summary

Midland Energy was fortunate enough to have a very skilled financial manager in Mortensen. Her expertise was respected by her promotion and the reliance the company had on her calculations. Midland Energy’s Vice President Janet Mortension was preparing her annual cost of capital for midland as well as for other 3 divisions

Exploration & production (E&P)

Refining & Marketing (R&M)

Petrochemicals

Midland has operations in oil and gas. It had been incorporated and 120 years and had more than 80,000 employees. The case uses many other comparison companies to estimate the asset and also the beta for each of its individual division, and must comply the capital asset pricing model for calculating the cost of capital. Midland was a little conservative compared to some of its competitors; however, it has a group of trader in-house who actively managed the currency for the company.

Midland utilizes a four prong approach to its financial and investment policies. Midland’s financial strategy in 2007 was founded on the following four pillars:

Optimal capital structure

Oversees Growth

Stock Repurchases

Value- Creating Investment

The senior vice president of the project finance for this company must determine the weighted average cost of capital for the whole company and also each of its divisions as a part of the annual capital budgeting process. This case takes into consideration other comparable companies to calculate the asset betas for each of its operating divisions and uses the Capital Asset Pricing Model to determine the cost of equity.

The case scrutinizes the individual business and financial risks of the company by employing the un-levered and re-levered beta method and also continues to analyze the aggregate total required on the invested capital in the company with the help of estimations of WACC and CAPM. Lastly, the case gives an overview of single and multiple hurdle rates and also the identification of all the suitable...