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1、4129JUNE19,2009TIMOTHYA.LUEHRMANJOELL.HEILPRINMidlandEnergyResources,Inc.:CostofCapitalInlateJanuary2007,JanetMortensen,seniorvicepresidentofprojectfinanceforMidlandEnergyResources,waspreparingherannualcostofcapitalestimatesforMidlandandeachofitsthreedivisions.Midlandwasaglobalenergyc
2、ompanywithoperationsinoilandgasexplorationandproduction(E&P),refiningandmarketing(R&M),andpetrochemicals.Onaconsolidatedbasis,thefirmhad2006operatingrevenueandoperatingincomeof$248.5billionand$42.2billion,respectively.EstimatesofthecostofcapitalwereusedinmanyanalyseswithinMidland,incl
3、udingassetappraisalsforbothcapitalbudgetingandfinancialaccounting,performanceassessments,M&Aproposals,andstockrepurchasedecisions.Someoftheseanalyseswereperformedatthedivisionorbusinessunitlevel,whileotherswereexecutedatthecorporatelevel.Midland’scorporatetreasurystaffhadbegunpreparin
4、gannualcostofcapitalestimatesforthecorporationandeachdivisionintheearly1980s.Theestimatesproducedbytreasurywereoftencriticized,andMidland’sdivisionpresidentsandcontrollerssometimeschallengedspecificassumptionsandinputs.In2002,Mortensen,thenasenioranalystreportingtotheCFO,wasaskedtoest
5、imateMidland’scostofcapitalinconnectionwithalargeproposedsharerepurchase.Sixmonthslatershewasaskedtocalculatecorporateanddivisionalcostsofcapitalthattheexecutiveandcompensationcommitteesoftheboardcouldincorporateinplannedperformanceevaluations.Sincethen,Mortensenhadundertakenasimilare
6、xerciseeachyearandherestimateshadbecomewidelycirculateddefactostandardsinmanyanalysesthroughoutthecompany,evenonesinwhichtheywerenotformallyrequired.By2007Mortensenwasawarethathercalculationshadbecomeinfluentialandshedevotedevermoretimeandcaretotheirpreparation.Latelyshewonderedwhethe
7、rtheywereactuallyappropriateforallapplicationsandshewasconsideringappendingasortof“user’sguide”tothe2007setofcalculations.________________________________________________________________________________________________________________HBSProfessorTimothyA.LuehrmanandIllinoisInstituteof
8、Techn
