Executive Summary Midland Energy Resources is a leading global energy developer dedicated to providing advanced power systems and energy services around the world. Midland Energy Resources has three divisions Exploration & Production, Refining & Marketing, and Petrochemicals. They have been incorporated more than 120 years previously and they have 80,000 employees in 2007. Janet Mortensen, the senior vice president of project finance for Midland Energy Resources must determine the weighted average cost of capital (WACC) for the company as a whole and each of its divisions as part of the annual capital budgeting process. As each division has different functions and risk associations, the ...view middle of the document...
Finally, Petrochemicals are chemical products made from raw materials of petroleum. Although, petrochemical is a very large growing business, Midland’s petrochemical performance is relatively low. Overall, Midland is a profitable company with a strong capital structure. Its stock price has increased continuously over time. Moreover, Midland’s earning per share and dividend per share have been grown up uninterruptedly. According to Exhibit 4, its earning per share has increased from $5.65 to $6.34 from 2002-2006 and dividend per share has also raised up from $1.11 to $1.46 from 2001-2006. Exhibit A and Exhibit B show profit margin comparison and size comparison among those three business units respectively. Exhibit A Exhibit B Risk Factors Midland Energy Resources is a high capital-spending company since this business’s nature requires heavy investment. This condition reflects both favorable and disadvantageous views. High capital investment is beneficial since it will be a
newcomer’s barrier by preventing potential competitors to easily access market. However, it is risky for company itself to remain high performance due to the fact that high-cost of capital company requires high rate of return. If any unexpected situations happen, it will slowly recover but double-dip recession. Furthermore, Midland’s business associates with natural resources, social acceptance and corporate social responsibility (CSR) have to be seriously considered. In Midland business climate, firm needs to tread carefully to maintain the trust of the public. Rearranging Financial Statements Beyond separating assets and liabilities on balance sheet, I am making a further distinction between real and financial activities of the firm to facilitate financial analysis. On the above side of Balance sheet will show net working capital and net fixed assets, both reflecting "real" activities, while on the below side will show debt and equity, both reflecting financial activities. Exhibit C is Midland’s rearranged Balance sheet. After rearranged the Balance sheet, Midland’s net working capital is 2,846 millions, net fixed assets is 179,634 millions, and net debt is 79,508 millions. Exhibit C Reorganized Midland Balance Sheets, at December 31 ($ in millions) Operating Account Working Capital Notes Receivable 19,681 Inventory 7,286 Prepaid Expenses 2,226 Less : Accounts Payable & Accrued Liabilities Taxes Payable 5,462 Net Working Capital (2,846) Working Asset Investments & Advances 34,205 Net Property, Plant & Equipment 167,350 Other Assets 9,294 Less : Post Retirement Benefit Obligations Accrued Liabilities 4,839 Deferred Taxes 14,179 Other Long Term Liabilities 2,725 Net Fixed Assets 179,634 Net Operating Assets 176,788
Financial Account Current Portion of Long Term Debt 20,767 Long Term Debt 81,078 Less : Cash & Cash equivalents 19,206 Restricted Cash 3,131 Net Debt 79,508
Shareholders' Equity Net Capital
Statement of problems To...