PROVIDE: answers to the following questions by thoroughly reading the case and researching into the topic of weighted average cost of capital (WACC) from other sources, as necessary:
- Part 1: These might include capital budgeting, analyses of stock repurchases and M&A proposals. In addition, Mortensen’s numbers will likely be used in performance assessments at the corporate and division levels that may well affect incentive compensation awards. Should the same WACC be used for both asset appraisals and performance assessments? Be specific (2 points)
- Part 2: Mortensen is calculating different WACCs for each Midland’s operating divisions: Exploration and Productions, Refining & Marketing, and Petrochemicals. Is this appropriate or should she use one company-wide WACC? Why or why not? (2 points)
- Part 3: Imagine running a multi-business company like Midland for many years while applying the same WACC as a hurdle rate for capital budgeting analyses in all divisions. What’s the downside of doing this? To be specific, what implications- if any- would that have to Midland’s future profitability or sustainability? (2 points)
- Part 4: Case states that Midland has foreign market exposures which might affect Midland’s ability to borrow against its foreign assets and hence its divisional target leverage ratios. The basic portfolio theory raises the question whether the country risk should be considered as a systematic risk and how it might affect the expected cash flows. Should the WACC be adjusted for country/political risk? Why or why not? (2 points)
- Part 5: Should the “hurdle” rates differ from WACC? Discuss all possible major implications. (2 points)
