TO:

(PP)
Petroleum
Pioneer
Board
Patel
Tara
Fedirko,
Lina
Gabriel,
Gal

Consultants
Finance
2012
20,
Rates
Discount
Divisional
to
Approach
and
Methods
Capital:
of
Management
FROM:
Corporate
March
RE:
Cost
MEMORANDUM
DATE:

Recommendation:
evaluating
hurdle
divisional
multiple
(PP)
discounted
thus
risk
vary
division
each
operations
because
firm-wide
Further,
industry.
reflecting
rates
use
should:
Capital,
Model
Pricing
Asset
compute
also
firm
approaches.
both
from
rate
average
an
reflect
final
risk,
market
Capital
Cost
Average
Weighted
Petroleum
Pioneer
things
assuming
reasonable,
be
approach
your
found
debt,
calculating
terms
three
those
Given
rating.
(3)
ratio,
(2)
rate,
tax
(1)
constant:
stay
technique1.
computing
standard
7.9%,
equates
debt
model.
employed
equity,
arrive
order
technique,
In
share.
earnings
used
PP
case
this
in
share,
its
at
look
to
has
company
new
when
year
dividends
projected
employ
should
calculation
and
price
stock
assumption,
(g)
apply
we
If
discussed.
are
projected/Price
Div.
R(e)
follows:
as
equity
1991,
for
share
per
$2.70
a
approach,
model
growth
dividend
the
using
Therefore,
14.28%.
10%
$63
$2.70/
=
g
+
1)
(Table
11.1%.
is
capital
of
cost
weighted
Using
projects,
appropriate
of
cost
account
In
will
assumptions,
the
addition,
investments
project
stock
average
Table
111.10%
Capital
of
Average
Weighted
growth
10%
a
with
Approach
Model
Growth
Proportions
Sources
Funds
After-
Future
Cost
Debt
Equity
WACC
Estimated
0.50
7.92%
14.28%
Weighted
3.96%
7.14%
Dividend
Source
of
1991
Tax
dividends
measure
10%
the
look
another
taking
worth
is
It
that
out
point
like
wed
dividends
actual
shareholders
to
commitment
its
on
based
percentage
uses
firm
growth
dividend
PPs
years,
previous
for
given
data
back
looking
However,
1991.
1990
in
large
The
growth.
no
was
there
1989
and
1986
between
example,
For
rate.
this
at
stay
always
not
growth.
increase
may
Also,
1

rate)
tax

(1
x
new
finance
to
rate
interest
=
debt
of
Cost

66.66%
so9.85%)
restructure,
company
due
happened
have
must
1986
in
share
per
(See
5.34%.
as
low
be
average
that
data
past
from
know
We
it.
ignore
can
9.85%.
to
decreases
equity
cost
the
rate,
growth
dividend
lower
a
assumption
an
With
1)
5.34%
$63
$2.84/
g
+
stock
of
projected/Price
Div.
=
(R(e)
2)
(Table
8.88%.
is
WACC
resulted
we
Appendix
The
Table
28.88%
Calculation
Capital
of
Average
Weighted
growth
dividend
average
for
Model
Growth
Proportions
Sources
Funds
After-
Future
Cost
Debt
Equity
WACC
Estimated
0.50
7.92%
9.85%
3.96%
4.92%
Dividend
Source
of
Weighted
1992
Tax
(CAPM)
Model
Pricing
Asset
Capital
calculation,
method
second
to
rate
free
a
0.82,
value
Beta
available
an
use
(SML),
Line
Market
Security
in
shown
(calculation
years
10
last
premium
risk
market
and
13.27%.
6.84%
x
0.8
+
7.8%
=
R(e)
follows:
as
could
equity
of
the
case,
In
4.
2)
10.66%.
be
will
capital
for
cost
average
Petroleums
Pioneer
approach,
this
on
Moving
based
7.8%3
appendix
Based
Table
30.50
Calculation
Capital
of
Cost
Average
Weighted
SML
Proportions
Sources
Funds
Future
WACC
CAPM
Estimated
Debt
Equity
Source
of
1990
Estimated
After-
Future
Cost
7.92% Tax
13.27%
Weighted
Cost
3.96%
6.70%
10.60%
above
an
compute
method,
WACC
corporate
single
adopt
PP
overall
account
will
average
This
9.77%.
=
8.88%
+
10.66%
is:
which
methods,
two
risks.
for
funds
investment
allocate
projects
evaluate
to
rates
hurdle
divisional
use
should
exploration
the
in
involved
was
it
business:
lines
multiple
has
company
The
divisions.
agricultural
plastics,
well
as
products,
petroleum
refined
marketing
and
oil
crude
of
mentioned
market
Pioneer
among
production
If
Case
2 3
T-bills
yield
2,
1
Exhibit
common
large
on
based
which
premium,
risk
market
for
estimate
7%
same
the
essentially
is
rate
Westerfield,
(Ross,
442
page
(FCF),
Finance
Corporate
of
Fundamentals
in
assumption
general
a
as
given
and
2010)
This
4
stocks
Jordan

chemicals
concentrates
now
restructured
later
was
company
development;
estate
real
utilize
lines
business
Companies
petrochemicals.
coal
gas,
accurately.
separately
measured
are
ensure
costs
single
assessment,
accurate
more
provides
multiple
rate.
standardized
tool
adequate
average
rejected
projects
riskiness
profitability
skew
high
low,
set
hurdle
If
WACC.
comparison
Thus,
made.
low
few
also
could
hand,
other
On
too
unprofitable
accept
both
because
method
evaluation
best
profits,
capitalize
evaluated
investments
bad
potentially
avoid
order
needs
this,
do
To
investments.
successful
select
expected
measure
stronger
allows
which
CAPM,
division
profits.
increase
portfolio
diversified
discount
divisional
derived
capital
before,
mentioned
ratio,
retain
aims
Assuming
financed.
how
Each
debt).
50%
from
(50%
ratio
funded
computing
by
investment,
need
would
beta.
result
variance
The
CAPM.
using
comparable
highly
or
similar
used
based
rates
individual
establish
play
pure
essentially,
So
class).
risk
same
within
fall
(industries
terms
In
industry.
counterpart
have
determine
issue
ability
firm
assuming
established
use
can
subsidiaries
all
debt,
increases,
rating
debt
Pioneers
however,
If,
constant.
fairly
remains
certain
at
decrease.
likely
interest
financing
recalculated,
on
return
required
minimum
as
serve
rate
WACC,
own
establishes
WACC
exceed
always
should
investment
IRR
estimated
an
means
This
higher
risky,
considered
a
Typically,
accepted.
project
lower.
be
beta
risky
less
if
beta,
firms
fluctuations.
to
sensitivity
their
illustrate
subsidiary
each
for
betas
different
investing
involved
risk
level
the
capture
calculation,
equity
of
cost
into
it
in
competitors
behind
lagging
not
Pioneer
that
assure
will
this
Further,
subsidiaries.
various
edge.
competitive
its
retains
is
and
segments,
market
Projects
oil,
divisional
Using
weighted
can
accepted
accepted.
investments5.
In
should
determined
return,
As
from
new
subsidiary
WACC
need
industries
approach,
of
debt
Once
investment.
order
than
Utilizing
Incorporating
into
different
Calculating
Environmental
5

text
class
the
in
stated
As

Lastly,
onsustainable
return
required
separate
use
should
determined
weve
First,
factors.
few
rates,
divisional
aligned
more
are
that
(e.g
divisions
across
vary
transportation
sustainable
an
risk
higher
have
might
assuming
competitors,
than
energy
cleaner
producing
in
runner
front
is
Pioneer
Second,
each
within
project
review
needs
it
edge,
competitive
its
retain
wants
firm
the
unique
due
lastly,
And
profit6.
making
while
regulations
new
following
aim
primary
with
rate
discount
given
to
need
those
profit-motive),
(not
projects
environmental
value
analysis
qualitative
a
but
gains,
future
of
assessment
quantitative
just
not
reflects
for
market
and
constraints,
regulation
growing
depletion,
resource
(given
created
be
will
products).
projects
extraction
products.)
division
goals
that
6
allowing
also
but
projects
environmental
into
investment
higher
for
calling
passes
be
to
continue
regulations
New
profit.
market
new
for

Appendix

calculation
average
years
recent
-
dividend
the
in
change
Percentage
1:
per
$2.00
$2.20
$2.45
$2.70
$2.84
54321
Dividend
Share
Year
Assumption
Proposed
growth
dividend
average
1987
1988
1989
1990
Current
*1986-1991
1986
1991
1992
Percent
Change
increase
10%
based
projection
1986
since
average
dividend-increase
on
-
0%
10.00%
11.36%
PP
*Based
5.34%
s

Dividends

($)
share
per
3.00
1989
1988
1987
1986
1985
1991
($)
share
per
2.50
2.00
1.50
1.00
0.50
0.00
1983
1984
1990
Dividends

Appendix
calculation
average
years
10

Returns
Market
2:
(%)
index
common
500
of
stocks
-4.9
21.4
22.5
6.3
32.2
18.5
5.3
16.8
31.5
-3.2
14.64%
10
987654321
Year
1990
1982
1983
1984
1985
1986
1987
1988
1989
1981
Average
years:
10
for
Rpremium

6.84%
7.8%
-
14.64%
risk
free

market
R
=