Essay About Midland Energy Resources And Risk Factors

Midland Energy ResourcesEssay Preview: Midland Energy ResourcesReport this essayMidland Energy Resources is a global energy company with operations in oil and gas exploration and production(E&P) providing a broad array of products and services to customers worldwide including refining and marketing (R&M) and petrochemicals. 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. Various considerations have to be evaluated as risk factors when calculating the cost-of capital.

Midland, as a large and diverse company, should not use a single hurdle rate for evaluating investment opportunities. Its different business segments have very different operating characteristics, as such, have very different margins and risk profiles. In Exhibit 5, the Equity Beta represents the risk factors of those segments. With risk profiles that are different for each of the business segments, the hurdle rates for those segments should also be different and primarily calculated based on the Beta of the specific business segment. Thus, Midland should calculate the cost of capital for each department and use it for assessments rather than a corporate level hurdle rate. Incase, a corporate level single hurdle rate is used, the investments in the high-risk departments may seem favorable and investments in low risk departments may seem unfavorable; thus forcing the management into making incorrect decisions. This also increases overall risks at the company level and for the shareholders.

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