Pioneer-Petroleum - Dinh Lobo,Pham Phung Velez Phyllis Lobo...

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Dinh, Lobo,Pham, Phung, Velez Phyllis Lobo Jose Velez Hong Pham Hiep Dinh Maggie Phung Professor Ertugrul December 18, 2014 Pioneer Petroleum Case Write-up Executive Summary: Pioneer Petroleum Corporation is one of the primary producers of crude oil, providing 60% of its petroleum liquids production to Alaska. Currently the company is weighing two alternatives to determining the minimum rate of return. There choices are single or multi-rate cutoffs. Question 1: Does Pioneer estimate its overall corporate weighted average cost of capital (WACC) correctly? Currently Pioneer estimates its WACC based on expected portions of future fund sources and costs were assigned to each of these sources then calculated based on these proportions and costs. Are they using correct weights? Explain. Debt Est. prp ftr fds .50 Est. ftr after-tax cst 7.9% Weighted Cost 4.0% Equity Est. prp ftr fds .50 Est. ftr after-tax cst 10%(set) Weighted Cost 5.0% Total = 9.0% 1
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Dinh, Lobo,Pham, Phung, Velez Investments should be expected to earn at least what an investment in common stock would. Since 1980 the average return on S&P index of common stocks is 16.25%.
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