Midland Energy Resource Case Analysis
Midland Energy Resource Case Analysis
I. Midland’s capital planning model and Janet Mortensen's role.
The capital-planning model adopted by Midland is MACC, standing for weighted average cost of capital. The primary role of Janet Mortensen is frequently calculating corporate and divisional costs of capital at division level as well as corporate level. In addition, she also needs to check the appropriateness of her calculation and append “user`s guide” to it. Evaluating M&A proposals, stock repurchase decision, and performance assessment.
II. Brief Explanation: cost of capital, WACC, and CAPM.
Cost of capital: the cost of corporate`s fund, including debt and equity. It is the minimum return rate that shareholders, investors, and lenders expect to compensate their risks. It is also the minimum profit that corporate tends to generate.
WACC: weighted average cost of capital. It is a way to calculate cost of capital based on company`s financial structure. It gives corresponding weight to different source of funds, which required different rate of return.
CAPM: capital asset pricing model. This model calculates the expected return of shareholders by risk-free rate, measure of systematic risk, and equity market risk premium.
III. Address what you use “cost of capital” to evaluate. How are Mortensen’s estimates used at Midland?
I will use “cost of capital” to evaluate the followings:
1. Planning investment. If this investment will meet the requirement;
2. Current on-going investment. If this investment has meet the requirement. If not, then evaluate future return;
3. Shut-down unsatisfied divisions or projects. If a division or a project does not generate enough profit and does not have a profitable future, considering shutting it down;
4. Repurchase of stocks or call bonds. If the stock price is lower or the bonds pay higher rate, considering halting them;
5. Capital structure. Reevaluating company`s debt...