Bethesda California Midland Energy Resources Inc Cost of Capital Case Study

Question Description

Components (in the WACC formula) are based on the (long?term) target debt?equity

ratio. Assume that the beta of debt (for both Midland and its divisions) is zero. Assume a marginal corporate tax rate of 40%. Midland will be using the cost of capital estimates to evaluate long?term projects.

a) Compute the asset beta of Midland (as a whole).

b) Compute the WACC (with taxes) for Midland.

a) Estimate the asset beta for the Exploration & Production division.

b) Compute the WACC (with taxes) for the Exploration & Production division.

a) Estimate the asset beta for the Refining & Marketing division.

b) Compute the WACC (with taxes) for the Refining & Marketing division.

4. Given the data in the case, how would you estimate the asset beta and the WACC for the Petrochemical division? A qualitative response (with some rough calculations) will suffice. Note: I am looking for an explanation other than that of identifying/using suitable comparables for the Petrochemicals division.

5. Should Midland compute and use a separate cost of capital for each of its divisions? Explain.

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