ExxonMobil ( XOM) is one of the half- dozen major oil companies in the world. Th
ID: 2640929 • Letter: E
Question
ExxonMobil ( XOM) is one of the half- dozen major oil companies in the world. The firm has four primary operating divisions ( upstream, downstream, chemical, and global services) as well as a number of operating companies that it has acquired over the years. A recent major acquisition was XTO Energy, which was acquired in 2009 for $ 41 billion. The XTO acquisition gave ExxonMobil a significant presence in the development of domestic unconventional natural gas resources, includ-ing the development of shale gas formations, which was booming at the time. Assume that you have just been hired to be an analyst working for ExxonMobil
Explanation / Answer
a) It is advised to use unit based cost of capital for analyzing capital expenditures in all its business units. Becasue each unit operates in different segment and under different economic conditions therefore risk premium differs from unit to unit accordingly division or units based cost of capital rate should be used.
b) Divisional cost of capital will be calcualted as per below process:
Divisional equity cost of capital will be calculated using CAPM method. Required return under CAPM model is calculated as = Risk free rate + Beta * Market premium.
Divisional debt cost will be calculated as Interest rate * (1 - Tax rate)
Beta will be different for each division based on its risk profile. Accordingly cost of capital will be calculated.
Weights can be taken as per taregt capital structure or if pattern of financing is specific to division level then weights will be calculated based on value of equity and debt invested in the division.
Finally WACC = Kd*Wd + Ke*We
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