In 2009, ExxonMobil (XOM) acquired XTO Energy for $ 41 billion. The acquisition

Question

In 2009, ExxonMobil (XOM) acquired XTO Energy for $ 41 billion. The acquisition provided ExxonMobil an opportunity to engage in the development of shale and unconventional natural gas resources within the continental United States. This acquisition added to ExxonMobil’s existing upstream (exploration and development) activities. In addition to this business segment, ExxonMobil was also engaged in chemicals and downstream operations related to the refining of crude oil into a variety of consumer and industrial products. How do you think the company should approach the determination of its cost of capital for making new capital investment decisions?

Explanation / Answer

While determining cost of Capital for new Capital investment decisions, the Company should consider the profitability, risk, cost involved in the Project, Life of the Project. Risk associated with a project directly affect the cost of Capital requierd to finance the Project. If the risk involve in the Project is high than the investors would demand higher return on their money and the cost of capital will go high. Cost of Capital also depend on the life of the Project. If the duration of the Project is long than the uncertanity of the return will be high and the Cost of Capital will also be more in that case.

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