CASE 2: MIDLAND ENERGY

1) Outline the use of WACC for different purposes. Do different uses require different
calculations/inputs?
2) Compute Midland's Corporate WACC. Discuss the inputs required.
3) Does each division require a different WACC? If so, compute the divisional WACCs.
4) How does leverage (capital structure) affect the WACC?
5) Summarize your findings


Step 1: Re-arrange the BS to separate operating items from financial items.

Step 2: Compute current D/E from above and compare it to target.


Step 3: Re-calculate Beta using long-term D/E target of 73% and consequently its
appropriate cost of equity.

--You must unlever the current beta and then re-lever.

Step 4: Compute the divisional beta of Petrochemicals using comparable peers.

Step 5: Compute WACC for each division.

Step 6: Compute CAPM unlevered. This provides a lower bound for cost of equity. The
WACC should be lower than this hence this sets upper bound for WACC.