GROUP-4

X005/14
X009/14
X010/14
X032/14

Midland Energy Resources Inc.

levered

1.25

D/E

###

D/V

###

rf
Spread to Treasury
EMRP

4.66%
1.62%
5.00%

unlevered

0.92

levered

1.33

rd

6.28%

re

###
8.12%

WACC

Assumptions:

Risk Free Rate

Equity Market Risk Premium

Midlands choice of Equity Market Risk Premium can be considered ok since it has be
consultaions with its professional advisers-primarily its bankers and auditors.Further
premium survey results too point at a lower rate.

DILSHAD JAMIL
GOYEENA GORAKHNATH
HARISH DEEPAK
SUPRIT R. SABAT

9771437402
8986874273
9470199400
8986874276

(i.e of Midland Energy Resources Inc. wrt to 2006 D/E

ratio)
(from Exhibit 5)
(From Table 1)
(from Table 1)
(from Table 1)

(i.e of company without any debt)

(Levered wrt the expected D/E ratio of Midland Resources
Energy for 2007)
(Cost of debt)
(Cost of equity)
(Weighted Average Cost of Capital)

Rate of US Treasury bonds for 30 year maturity i.e 4.66%

The 10-year risk-free rate se

assets.1-year period seems t

5%

With a very low standard of

agreeing with 5% as an estim

Market Risk Premium can be considered ok since it has been taken after
sional advisers-primarily its bankers and auditors.Further market risk
point at a lower rate.

9771437402
8986874273
9470199400
8986874276

dilshad.jamil14e@iimranchi.ac.in
goyeena.gorakhnath14e@iimranchi.ac.in
harish.deepak14e@iimranchi.ac.in
suprit.sabatl14e@iimranchi.ac.in

Tax Rate

39.72%

E/V

57.80%

D/Eexpected

73.01%

Equations Used
levered = unlevered (1+(1-T)(D/V))
D/V + E/V = 1
rd = rf + Spread of Treasury
re = rf + levered(EMRP)
WACC = rd(D/V)(1-T) + re(E/V)

The 10-year risk-free rate seems more appropriate because Midlands investments are based primarily on i
assets.1-year period seems to be too small wheras 30-year period is too long a time in this case.

With a very low standard of error (based on the chart) and advisors, bankers, and investors covering the in
agreeing with 5% as an estimate Janet Mortensen decided to go for this rate

dilshad.jamil14e@iimranchi.ac.in
goyeena.gorakhnath14e@iimranchi.ac.in
harish.deepak14e@iimranchi.ac.in
suprit.sabatl14e@iimranchi.ac.in

(Calculated from the average of the tax deductions in

Exhibit 1)
(Calculated from the value of D/V ratio given in Table 1)
(Calculated from the value of D/V and E/V ratios for the year
2007)

e appropriate because Midlands investments are based primarily on its

small wheras 30-year period is too long a time in this case.

ased on the chart) and advisors, bankers, and investors covering the industry
et Mortensen decided to go for this rate

Exploration And Production

levered
D/E

1.150
39.80%

D/V

46.00%

rf
Spread to Treasury
EMRP

4.980%
1.60%
5.00%

unlevered

0.927

levered

1.404

rd

6.580%

re

12.00%
8.304%

WACC

Assumptions:

Risk Free Rate

Equity Market Risk Premium

(i.e of Exploration And Production of market)

(from Exhibit 5)

Tax Rate
E/V

(From Table 1)

D/Eexpected

(from Table 1)
(from Table 1)

Equations Used
(i.e of Exploration and Production without any debt)

levered = unlevered (1+(1-T)(D/V))

(Levered wrt the expected D/E ratio of Exploration

And Production for 2007)

D/V + E/V = 1

(Cost of debt)

rd = rf + Spread of Treasury

(Cost of equity)
(Weighted Average Cost of Capital)

re = rf + levered(EMRP)

WACC = rd(D/V)(1-T) + re(E/V

Rate of US Treasury bonds for 30 year maturity i.e 4.98%

The 30-year risk-free rate see

primarily on its energy reserv
materialize.

5%

With a very low standard of

covering the industry agreein

39.72%
54.00%
85.19%

(Calculated from the average of the tax deductions in Exhibit 1)

(Calculated from the value of D/V ratio given in Table 1)
(Calculated from the value of D/V and E/V ratios for the year
2007)

quations Used
= unlevered (1+(1-T)(D/V))

+ E/V = 1

rf + Spread of Treasury

rf + levered(EMRP)

C = rd(D/V)(1-T) + re(E/V)

he 30-year risk-free rate seems more appropriate because Midland E&P's investmets are based
imarily on its energy reserves and long-lived assets which in this case may take years to
aterialize.

With a very low standard of error (based on the chart) and advisors, bankers, and investors
vering the industry agreeing with 5% as an estimate Janet Mortensen decided to go for this rate.

Refining And Marketing

levered

1.20

D/E

###

D/V

###

rf
Spread to Treasury
EMRP

4.66%
1.80%
5.00%

unlevered

1.07

levered

1.36

rd

6.46%

re

###
9.11%

WACC

Assumptions:

Risk Free Rate

Equity Market Risk Premium

(i.e of Refining And Marketing of market)

Tax Rate

(from Exhibit 5)

E/V

(From Table 1)

D/Eexpected

(From Table 1)
(From Table 1)

Equations Used
(i.e of Refining and Marketing without any
debt)

levered = unlevered (1+(1-T)(D/V))

(Levered wrt the expected D/E ratio of

Refining and Marketing for 2007)

D/V + E/V = 1

(Cost of debt)

rd = rf + Spread of Treasury

(Cost of equity)
(Weighted Average Cost of Capital)

re = rf + levered(EMRP)

WACC = rd(D/V)(1-T) + re(E/V

Rate of US Treasury bonds for 10-year maturity i.e 4.66%

The 10-year risk-free rate seem

on its energy reserves and time

5%

With a very low standard of er

the industry agreeing with 5% a

###

(Calculated from the average of the tax deductions in Exhibit 1)

###

(Calculated from the value of D/V ratio given in Table 1)

(Calculated from the value of D/V and E/V ratios for the year
2007)

###

ns Used

unlevered (1+(1-T)(D/V))

V = 1
Spread of Treasury

+ levered(EMRP)
rd(D/V)(1-T) + re(E/V)

ear risk-free rate seems more appropriate because Midlands investments are based primarily
ergy reserves and time required to capitalize on them

ery low standard of error (based on the chart) and advisors, bankers, and investors covering
try agreeing with 5% as an estimate Janet Mortensen decided to go for this rate

Petrochemicals

In order to get for Petrochemicals, we will need to take a weighted average of the thre

unlevered
Exploration and
Production

0.93

Refining and
Marketing

1.07

Petrochemicals

Net Consolidated

0.92

D/V

40.00%

WE&P

0.53

WR&M

0.36

WP

0.11

unlevered

0.40

levered

0.56

rd

6.01%

re

7.46%
5.92%

WACC

Assumptions

Risk Free Rate

Equity Market Risk Premium

emicals, we will need to take a weighted average of the three divisions based on their proportion of assets and

Total Assets
140100

Tax Rate

93829

E/V

28450

D/Eexpected

262379

rf

(From Table 1)

Spread to Treasury
EMRP
Equations Used

(Weightage for Exploration and Production)

unlevered (consolidated) = (WE&P*unlevered(

(Weightage for Refining and Manufacture)

levered = unlevered (1+(1-T)(D/V))

(Weightage for Petrochemical)

D/V + E/V = 1

(i.e of Petrochemical without any debt)

rd = rf + Spread of Treasury

(Levered wrt the expected D/E ratio of

Refining and Marketing for 2007)

re = rf + levered(EMRP)

(Cost of debt)

WACC = rd(D/V)(1-T) + re(E/V)

(Cost of equity)
(Weighted Average Cost of Capital)

Rate of US Treasury bonds for 10-year maturity i.e

4.66%

The 10-year risk-free rate seems more

its energy reserves and time required t

5%

With a very low standard of error (bas

industry agreeing with 5% as an estima

r proportion of assets and then solve for the only unknown value i.e unlevered for Petrochemicals

39.72%

(Calculated from the average of the tax deductions in Exhibit 1)

60.00%

(Calculated from the value of D/V ratio given in Table 1)

66.67%

(Calculated from the value of D/V and E/V ratios for the year 2007)

4.66%

(from Table 1)

1.35%
5.00%

(from Table 1)

Used

olidated) = (WE&P*unlevered(E&P)+WR&M*unlevered(R&M)+WP*unlevered(P))/(WE&P+WR&M+WP)

vered

(1+(1-T)(D/V))

= 1

read of Treasury

vered

(EMRP)

D/V)(1-T) + re(E/V)

risk-free rate seems more appropriate because Midlands investments are based primarily on
serves and time required to capitalize on them

low standard of error (based on the chart) and advisors, bankers, and investors covering the
eing with 5% as an estimate Janet Mortensen decided to go for this rate