20317Midland.pdf - Midland Energy Cost of Capital Estimates for 2007 Finance 203 Midland Energy 1 Midland A global energy company 2006 Operating

20317Midland.pdf - Midland Energy Cost of Capital Estimates...

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Midland Energy Cost of Capital Estimates for 2007 Finance 203: Midland Energy 1
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Midland A global energy company 2006 Operating Revenues of $248.5 billion 2006 Operating Income of $42.2 billion 2006 After tax earnings $18.7 billion $240.1 billion of non-cash assets $22.3 billion cash Three Divisions Oil and gas exploration and production (E&P) Refining and Marketing (R&M) Petrochemicals Finance 203: Midland Energy 2
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Midland’s Divisions Oil and gas exploration and production (E&P) 2006 Operating Revenues of $22.4 billion 9% of Midland 2006 Operating Revenues 2006 after tax earnings of $12.6 billion 67% of Midland 2006 after tax earnings $140.1 billion of assets 53% of Midland 2006 assets Finance 203: Midland Energy 3
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Midland’s Divisions Refining and Marketing (R&M) 2006 Operating Revenues of $203 billion 82% of Midland 2006 Operating Revenues 2006 after tax earnings of $4 billion 21% of Midland 2006 after tax earnings $93.8 billion of assets 36% of Midland 2006 assets Finance 203: Midland Energy 4
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Midland’s Divisions Petrochemicals 2006 Operating Revenues of $23.2 billion 9% of Midland 2006 Operating Revenues 2006 after tax earnings of $2.1 billion 11% of Midland 2006 after tax earnings $28.5 billion of assets 11% of Midland 2006 assets Finance 203: Midland Energy 5
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Midland’s Cost of Capital Estimates First calculated in 2002 For Midland For use in stock repurchase decision For each of the divisions For performance evaluation For capital budgeting decisions Finance 203: Midland Energy 6
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Equity Return for Midland Use for deciding whether to repurchase shares Discount flows to equity Gives Equity Value as PV of equity flows that can be compared to the market cap (share price*shares) Finance 203: Midland Energy 7 6 Exhibit from is EMRP 2 Table from Bond - T year - 30 is 5 Exhibit from is Return Equity f M f E f M E f E E r Er r r Er r Er Er
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Expected Market Return Premium (EMRP) Exhibit 6 Table A: Historical averages range from 5.1% to 7.1% Exhibit 6 Table A: Survey results give lower numbers ranging from 2% to 4.7% We’ll use: 3.6% (Welch Median) (serves as Lower Bound) 5%* Midland choice near 4.8% (1967-2006 average) recent, relatively high standard error but close to 1798-2006 average of 5.1% which has the lowest standard error 6% past Midland choice 7.1% (1926-2006 average) relatively low standard error, highest historical average (serves as Upper Bound) We’ll focus on 5% Others will be used for sensitivity analysis Finance 203: Midland Energy 8
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Midland Equity Return Finance 203: Midland Energy 9 Midland Equity beta (Exhibit 5) 1.25 30 treas rate (Table 2) 4.98% Midland EMRP Equity return 3.60% 9.48% 5.00% 11.23% 6.00% 12.48% 7.10% 13.86%
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WACC for Midland Use for deciding whether to repurchase shares Use to discount UFCF PV of UFCF, discounted at WACC, gives Enterprise Value (EV) of Midland Equity Value of Midland equals Enterprise Value less net debt Equity value can be compared to Midland’s market cap for the purpose of deciding whether to repurchase shares Finance 203: Midland Energy 10
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