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Midland Energy Resource

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Our team has performed thorough analysis surrounding the questions of cost of capital for Midland Energy Resources, Inc. (Midland). Here are the results of our research: 1. Ms. Mortensen estimates Midland’s cost of capital for a variety of reasons including use for capital budgeting, financial accounting, performance assessments, stock repurchase estimations, and potential “M&A” opportunities. In addition, Midland relies on the cost of capital to deliver on the financial and investment policies set forth by the Board. Finally, the cost of capital is also used in relation to expected growth and forecasted demand. To explain, if the forecasting department foresees an increase in sales of resources, Ms. Mortensen can use the cost of capital to properly determine if it is financially sound to make an investment in the company to support that demand.
Should Ms. Mortensen overestimate the cost of capital for the firm, Midland may miss out on investment opportunities and will under value the investment at hand. Furthermore, it is possible for shareholders to see a lower return on their investment.
At the other end, in which the cost of capital is understated, Midland may engage in an investment that is potentially “bad” and will be overvalued. Shareholders will see over inflated returns based on this approach.

2. Based on our calculations, our team has determined that Midland’s firm-wide WACC is 8.48%. Assumptions that our team made can be found starting on cell F25 on the Exhibit 5 tab. The EMRP(5%) was taken out of the context of the case study, the risk-free rate(4.98%) derives from the 30 year treasury yield from Table 1 which is the most stable data, and the tax-rate(40%) was calculated based on the average of the amount of taxes paid in the years 2004-2006 from Exhibit 1. Our first step (please see Midland Energy Resources – Final…...

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