case1_group4

ConsolidatedGROUP-4X005/14DILSHAD [email protected]/14GOYEENA [email protected]/14HARISH [email protected]/14SUPRIT R. [email protected] Energy Resources Inc.levered1.25(i.e of Midland Energy Resources Inc. wrt to 2006 D/E ratio)Tax Rate39.72%(Calculated from the average of the tax deductions in Exhibit 1)D/E59.30%(from Exhibit 5)E/V57.80%(Calculated from the value of D/V ratio given in Table 1)D/V42.20%(From Table 1)D/Eexpected73.01%(Calculated from the value of D/V and E/V ratios for the year 2007)rf4.66%(from Table 1)Spread to Treasury1.62%(from Table 1)EMRP5.00%Equations Usedunlevered0.92(i.e of company without any debt)levered = unlevered (1+(1-T)(D/V))levered1.33(Levered wrt the expected D/E ratio of Midland Resources Energy for 2007)D/V + E/V = 1rd6.28%(Cost of debt)rd = rf + Spread of Treasuryre11.29%(Cost of equity)re = rf + levered(EMRP)WACC8.12%(Weighted Average Cost of Capital)WACC = rd(D/V)(1-T) + re(E/V)

Assumptions:1Risk Free Rate Rate of US Treasury bonds for 30 year maturity i.e 4.66%The 10-year risk-free rate seems more appropriate because Midlands investments are based primarily on its assets.1-year period seems to be too small wheras 30-year period is too long a time in this case.2Equity Market Risk Premium5% With a very low standard of error (based on the chart) and advisors, bankers, and investors covering the industry agreeing with 5% as an estimate Janet Mortensen decided to go for this rateMidlands choice of Equity Market Risk Premium can be considered ok since it has been taken after consultaions with its professional advisers-primarily its bankers and auditors.Further market risk premium survey results too point at a lower rate.

E&PExploration And Productionlevered1.150(i.e of Exploration And Production of market)Tax Rate39.72%(Calculated from the average of the tax deductions in Exhibit 1)D/E39.80%(from Exhibit 5)E/V54.00%(Calculated from the value of D/V ratio given in Table 1)D/V46.00%(From Table 1)D/Eexpected85.19%(Calculated from the value of D/V and E/V ratios for the year 2007)rf4.980%(from Table 1)Spread to Treasury1.60%(from Table 1)EMRP5.00%

Equations Usedunlevered0.927(i.e of Exploration and Production without any debt)levered = unlevered (1+(1-T)(D/V))levered1.404(Levered wrt the expected D/E ratio of Exploration And Production for 2007)D/V + E/V = 1rd6.580%(Cost of debt)rd = rf + Spread of Treasuryre12.00%(Cost of equity)re = rf + levered(EMRP)WACC8.304%(Weighted Average Cost of Capital)WACC = rd(D/V)(1-T) + re(E/V)Assumptions:

1Risk Free Rate Rate of US Treasury bonds for 30 year maturity i.e 4.98%The 30-year risk-free rate seems more appropriate because Midland E&P's investmets are based primarily on its energy reserves and long-lived assets which in this case may take years to materialize.2Equity Market Risk Premium5% With a very low standard of error (based on the chart) and advisors, bankers, and investors covering the industry agreeing with 5% as an estimate Janet Mortensen decided to go for this rate.

R&MRefining And Marketinglevered1.20(i.e of Refining And Marketing of market)Tax Rate39.72%(Calculated from the average of the tax deductions in Exhibit 1)D/E20.30%(from Exhibit 5)E/V69.00%(Calculated from the value of D/V ratio given in Table 1)D/V31.00%(From Table 1)D/Eexpected44.93%(Calculated from the value of D/V and E/V ratios for the year 2007)rf4.66%(From Table 1)Spread to Treasury1.80%(From Table 1)EMRP5.00%

Equations Usedunlevered1.07(i.e of Refining and Marketing without any debt)levered = unlevered (1+(1-T)(D/V))levered1.36(Levered wrt the expected D/E ratio of Refining and Marketing for 2007)D/V + E/V = 1rd6.46%(Cost of debt)rd = rf + Spread of Treasuryre11.45%(Cost of equity)re = rf + levered(EMRP)WACC9.11%(Weighted Average Cost of Capital)WACC = rd(D/V)(1-T) + re(E/V)Assumptions:1Risk Free Rate Rate of US Treasury bonds for 10-year maturity i.e 4.66%The 10-year risk-free rate seems more appropriate because Midlands investments are based primarily on its energy reserves and time required to capitalize on them2Equity Market Risk Premium5% With a very low standard of error (based on the chart) and advisors, bankers, and investors covering the industry agreeing with 5% as an estimate Janet Mortensen decided to go for this rate

PetrochemicalsPetrochemicalsIn order to get for Petrochemicals, we will need to take a weighted average of the three divisions based on their proportion of assets and then solve for the only unknown value i.e unlevered for Petrochemicals

unleveredTotal AssetsExploration and Production0.93140100Tax Rate39.72%(Calculated from the average of the tax deductions in Exhibit 1)Refining and Marketing1.0793829E/V60.00%(Calculated from the value of D/V ratio given in Table 1)Petrochemicals-28450D/Eexpected66.67%(Calculated from the value of D/V and E/V ratios for the year 2007)Net Consolidated0.92262379rf4.66%(from Table 1)Spread to Treasury1.35%(from Table 1)D/V40.00%(From Table 1)EMRP5.00%

Equations UsedWE&P0.53(Weightage for Exploration and Production)unlevered (consolidated) = (WE&P*unlevered(E&P)+WR&M*unlevered(R&M)+WP*unlevered(P))/(WE&P+WR&M+WP)WR&M0.36(Weightage for Refining and Manufacture)levered = unlevered (1+(1-T)(D/V))WP0.11(Weightage for Petrochemical)D/V + E/V = 1unlevered0.40(i.e of Petrochemical without any debt)rd = rf + Spread of Treasurylevered0.56(Levered wrt the expected D/E ratio of Refining and Marketing for 2007)re = rf + levered(EMRP)rd6.01%(Cost of debt)WACC = rd(D/V)(1-T) + re(E/V)re7.46%(Cost of equity)WACC5.92%(Weighted Average Cost of Capital)

Assumptions1Risk Free Rate Rate of US Treasury bonds for 10-year maturity i.e 4.66%The 10-year risk-free rate seems more appropriate because Midlands investments are based primarily on its energy reserves and time required to capitalize on them2Equity Market Risk Premium5% With a very low standard of error (based on the chart) and advisors, bankers, and investors covering the industry agreeing with 5% as an estimate Janet Mortensen decided to go for this rate

case1_group4

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