Midland Energy

Midland is a global energy company with three different operations:

Oil and gas exploration and production (E&P),

Refining and marketing (R&M), and

Petrochemicals.

Since 2002, the company has entrusted the preparation of the annual cost of capital estimates for Midland and each of its divisions to Janet Mortensen. Janet started as a senior analyst in 2002 and became a senior vice president of project finance in 2007.

Janet’s estimates of the cost of capital used to be the responsibility of the treasury staff, but since Midland’s division presidents and controllers often challenged the assumptions/inputs, Janet took over that role.

Her estimates are used in many analyses within Midland, including:

asset appraisals for both capital budgeting and financial accounting,

performance assessments,

M&A proposals, and

stock repurchase decisions.

Cost of Capital: the required return for a company to justify a project/investment. It refers to the cost of a company’s debts and its equity. For a regular investor, it is the opportunity cost, the cost of investing into a particular stock versus another investment vehicle (bonds, savings, CDs…)

WACC: is the weighted cost of capital. It is the required rate of return for a company to invest in a project. It is calculated by proportionately weighting the cost of all securities (i.e. common stock, preferred stock, bond…). Since each type of securities are expect different returns, WACC is calculated by taking their weights into account.

The formula is: WACC = [(E/V) * re] + [(D/V)