Pioneer – Determine a Minimum Acceptable Rate of ReTurn On New Capital Investments
Essay Preview: Pioneer – Determine a Minimum Acceptable Rate of ReTurn On New Capital Investments
Report this essay
Pioneer
Problem: determine a minimum acceptable rate of return on new capital investments
Capital budgeting approach: accept all proposed investments with a positive net present value when discounted at the appropriate cost of capital. 接受所有NPV为ćŁçš„项目
At issue: how the appropriate discount rate would be determined. 决定最小贴现率/报酬率
Other approaches to determine a minimum rate of return:
1. a single cutoff rate based on the company’s overall weighed average cost of capital
2. a system of multiple cutoff rates that reflected the risk-profit characteristics of the several businesses or economic sectors in which the company’s subsidiaries operated.
Pioneer:
Formed in 1924 with the merger of firms operating in the oil refining, pipeline transportation, and industrial chemical fields.
1924-1984, integrated vertically into exploration and production of crude oil and marketing refined petroleum products and horizontally into plastics, agricultural chemicals, and real-estate development.
1985, restructured as a hydrocarbons-based company, concentrating on oil, gas, coal and petrochemicals.
One of the primary producers of Alaskan crude; in 1990 Alaska provided 60%of Pioneer’s production. One of the lowest cost refiners on the West Coast and has an extensive West Coast marketing network. (Pioneer’s Alaskan crude production)
Volatile oil prices:
1990, Q1 21.8; mid-June 15.5; with the invasion, more than 40, fell to 25 at the end of the year. Average 24.5/barrel. The management of Pioneer emphasized the importance of operational and financial flexibility to respond to these price swings.
Capital expenditures:
Allow the refineries to more efficiently process (good returns higher than the industry average)
Exploration and development
Environmental projects ($3 billion in the next 5 years); MTBE/SMOGMAN
WACC: debt 7.9%; equity 10%; prop:50%. WACC=9%
Debt:50%
Cash dividends increased by 10% in both 1990,1991
Debt coupon 12%, tax 34%, after debt is 7.9%
Equity: current earnings yield on the stock as the cost of both new equity and retained earnings. No dilution. 6.15/63
Divisional costs of capital
The divisional rate would