Assignment:
Once you have read the case, prepare a written case analysis (5 to 8 pages long in Word or no more than 10 PowerPoint Slides).
The case analysis should do the following:
1. Describe Midland, its capital planning model and Janet Mortensen's role in the case.
2. Briefly explain the meaning of the following concepts: cost of capital, WACC, and CAPM.
3. Address what you use "cost of capital" to evaluate. How are Mortensen's estimates used at Midland?
4. Compute Midland's Corporate WACC. Be prepared to defend it and to discuss cost of debt and cost of equity.
5. Should Midland compute different WACC for each division? Why or why not?
6. If you were to compute a WACC for each division, how can we get asset betas for divisions? How should comps be selected?
7. Calculate the WACC for the Petrochemicals Division. Think of the same issues you considered for the Corporate WACC.
Success in your analysis will be measured based on the following criteria: (1) quality of case analysis and (2) clarity and cohesiveness of written work specifically in response to the 7 items posted above.
Readings:
Midland Energy Resources, Inc: Cost of Capital
By Timothy A. Luehrman, Joel L. Heilprin