Midland Energy Resources, Inc.

The cost of equity is the theoretical return that equity investors expect or receive from the company for investing their funds in the company. The risk free rate that is the Government Treasury bill rate is 3.1%, the market risk premium is 7% and the beta has been calculated as

1. How are Mortensen’s estimates of Midland’s cost of capital used? How, if at all, should these anticipated uses affect the calculations?

The mixture of debt-equity mix is important so as to maximize the stock price of the Costco. However, it will be significant to consider the Weighted Average Cost of Capital (WACC) as well so that it can evaluate the company targeted capital structure. Cost of capital (OC) may be used by the companies as for long term decision making, so industries that faced to take the important of Cost of capital seriously may not make the right choice by choosing the right project(Gitman’s, ).

1. Determine the Weighted Average Cost of Capital (WACC) based on using retained earnings in the capital structure.

To find the cost of equity we used the formula rs = rRF + beta*MRP in which rRF2002 = 5.86% and the Market Risk Premium (MRP) = 5% as calculated by the Southwest Airlines finance department. We then calculated the beta for Southwest Airlines based on a regression analysis of five-year monthly returns on Southwest stock from January 1997 to January 2002, compared with the S&P 500 returns over the same period. This regression analysis indicated that Beta = .2219. Therefore,

Please refer to Appendix 2 for other considerations for cost of equity calculations. Most firms use the Capital Asset Pricing Model (CAPM) to determine the cost of equity. The components that make up the CAPM include: the risk free rate, the beta of the security, and the expected market return of the stock. These values are all based on forward-looking data. The model dictates that shareholders require a return equal to the return from a risk-free investment plus an equity risk premium for bearing extra risk. Refer to Appendix 1 for a full breakdown of the CAPM formula.

Amoco itself had sold more than $750 million worth of small properties which, it felt, could be

We added the market risk premium of 6% to the 4.60% because 6% is the rate that investors want above the risk free rate due to the risk of the investment. This equals 10.6% which is then multiplied by the beta of the company of 1.1. Beta is a measure of the stock’s volatility in relation to the market. A beta of 1.1 means that Worldwide Paper Company has slightly higher volatility than the market does. The total cost of equity then calculates to equal 11.2%. This tells us that given the risk taken in investing in the company, a shareholder should expect an 11.2% return.

This paper will deliberate on an manufacturing company's yearly report. Utilizing the figured ratios, I will break down the execution of the firm. I will figure out how the firm is performing under each of the recorded degrees.

To estimate the cost of equity, we need to compute the beta of equity for each division using comparable companies. As the betas of debt were not provided, we made 2 assumptions: a. same business lines have the same beta of debt; b. Expected return of debt = Rf + βb*[E(Rm) – Rf*(1-T)] (Rf: risk free rate, E(Rm): expected

In recalculating PP’s WACC correctly their actual average cost of capital came out to be 11.3% as opposed to the 9% that PP has calculated. This shows that PP underestimated their WACC by 2.3% due to the fact that they set equity at 10%. If PP chooses to continue to use their single cutoff rate based on the company’s overall WACC, they will now have a cutoff of 11.3%. Again, the problem with using the single rate method is that it does not allow use to see, or account for the differences in each division of PP. Another problem with the single cutoff rate is that due to the increased rate PP will invest their funds in higher return projects which will result in higher risk. This risk is a result of only the high-risk divisions being able to exceed the single rate hurdles using the single rate cutoff method.

The cost of capital is calculated for Midland on a firm-wide and divisional level in this paper. On a divisional level, asset betas of 0.9325 and 1.0490 are calculated for E&P and R&M respectively based on comparable firms. The asset beta for PC is back-calculated based on a formula relating the divisional betas to the firm-wide beta, thus resulting in 0.4517. Divisional betas are re-levered at target D/E ratios as provided in the case and the resulting costs of equity (using a simple CAPM) are 11.25%, 12.32%, 7.89% while the resulting WACCs are 7.81%, 9.71%, 6.18% for E&P, R&M and PC respectively.

Definition: cost of capital is the rate of return that a company must earn on its project investments to maintain its market value and attract funds. The cost of capital to a company is the minimum rate of return that is must earn on its investments in order to satisfy the various categories of investors, who have made investments in the form of shares , debentures and loans. The cost of capital in operational terms refers to the discount rate that would be used in determining the present value of the estimated future cash proceeds and eventually deciding whether the project is worth undertaking or not. It is defined as "the minimum rate of return" that a firm must earn on its investment for the market value of the firm

Debt to equity (D/E) ratio is often used as an independent variable of audit pricing model to measure a firm’s capital

In this work, the corporate performance of McDonald’s Corp has been evaluated in terms of review of the company’s financial statement. McDonald’s Pro Forma financial statements for the next two fiscal years were produced in order to determine if the firm’s anticipated performance is in line with their targets and also to determine future financing needs of the company. This was followed by the complete financial ratio analysis of McDonald’s Corp, its Return on Equity (ROE) DuPont analysis, and its Economic Value Added (EVA). These analyses were carried out to determine the soundness of the company’s financial policies and also to make decision on whether to invest in the company’s stock or not.