Advanced Corporate Finance: Pioneer Petroleum

Calculations

Working 1
Calculation of Dividend Payout ratio and dividend growth

1983 1984 1985

EPS 3.38 2.27 0.86
DPS 1.75 1.5 1.2
PAYOUT RATIO 0.52 0.66 1.40
Dividend Growth (0.14) (0.20)

Working 2
Calculaton of Risk premium

1980 1981 1982

Realised returns S&P 500 index (%) 32.4 -4.9 21.4
91 Day T Bill (%) 11.2 14.7 10.5
Risk Premium 21.2 -19.6 10.9

Working 3
Calculation of Ke on the basis CAPM approach

1. Here we have used the average returns of S&P against the most recent T bill rate.
Risk Free Rate Latest 91 Day 7.8
Beta Provided 0.8
Market Rate of Return 11 yr Avg. Re 16.25
Ke 14.56

2. Here, we have used an Average of the Risk Premium over the 10 years.
Risk Free Rate Latest 91 Day 7.8
Beta Provided 0.8
Risk Premium Average of 10 7.88
Ke 14.11

3. Here, we calculate the cost of equity from Gordon's Dividend growth model. For calculating the dividend for 1

DPS (1991) 2.64

Market price (1990) 63
g 7.68%
Ke 11.87%

Working 4
Calculation of WACC
Proposed WACC on the basis of approach 1
Weight After Tax Cost Weighted
Debt 0.5 6.20% 3.10%
Equity 0.5 14.56% 7.28%
10.38%

Proposed WACC on the basis of approach 2

Weight After Tax Cost Weighted
Debt 0.5 6.20% 3.10%
Equity 0.5 14.11% 7.05%
10.15%

Proposed WACC on the basis of approach 3

Weight After Tax Cost Weighted
Debt 0.5 6.20% 3.10%
Equity 0.5 11.87% 5.93%
9.03%

Working 5
Divisional Cost of Capital

Low Risk Division

Risk Free Rate Latest 91 Day 9.4
Beta Provided 0.3
Risk Premium Average of 10 7.88
Ke 11.76

Weight After Tax Cost Weighted

Debt 0.5 6.20% 3.10%
Equity 0.5 11.76% 5.88%
8.98%
 1986 1987 1988 1989 1990
1.65 3.41 4.43 5.59 6.15
2 2 2 2.2 2.45
1.21 0.59 0.45 0.39 0.40
0.67 - - 0.10 0.11

1983 1984 1985 1986 1987

22.5 6.3 32.2 18.5 5.3
8.8 9.9 7.7 6.2 5.5
13.7 -3.6 24.5 12.3 -0.2

For calculating the dividend for 1991, we have considered an average growth rate of 7.68% ( as calculated in working 1)
High Risk Division
Risk Free Rate Latest 91 Day T Bill 9.4
Beta Provided 0.8
Risk Premium Average of 10 years 7.88
Ke 15.71

Weight After Tax Cost Weighted

Debt 0.5 6.20% 3.10%
Equity 0.5 15.71% 7.85%
10.95%
 Average
3.47
1.89
70.20%
7.68%

1988 1989 1990 Avg

16.8 31.5 -3.20 16.25
6.4 3.4 7.8 8.37
10.4 28.1 -11 7.88

calculated in working 1)
Advanced Corporate Finance: Pioneer Petroleum
Given information

Exihibit 1
1983 1984 1985 1986 1987
Sales ($ million) 20397 20268 18594 12687 14182
Net Income ($ million) 1133 326 -297 428 923
EPS 3.38 2.27 0.86 1.65 3.41
DPS 1.75 1.5 1.2 2 2
ROE 15.9 13 4.8 11.4 19.6
Beta

Exihibit 2
1980 1981 1982 1983 1984
Yields on newly issued
AA industrials (%) 11.8 14 13.4 11.9 12.9
Realised returns S&P
500 index (%) 32.4 -4.9 21.4 22.5 6.3
91 Day T Bill (%) 11.2 14.7 10.5 8.8 9.9

Exihibit 3
Weight After Tax CostWeighted
Debt 0.5 7.90% 0.0395
Equity 0.5 10.00% 0.05
8.95%

Exihibit 4
1990 1991 (E)
Capex (In Billion) $3.10 $4.50
Dividend Growth 10% 10%

Environmental Projects C $3.00

1990 Crude Oil ($/Barrel)

Q1 21.8
Q2 15.5
Q3 40
Q4 25
Avg 25.575

Exihibit 4
Divisional CoC
Exploration 20%
Transportation 10%

Target Debt Equity 1

Leverage 50%
 1988 1989 1990
15259 13417 15646
1211 1542 1555
4.43 5.59 6.15
2 2.2 2.45
21.2 26.3 25
0.8

1985 1986 1987 1988 1989 1990 Avg

11.4 9.4 9.7 9.9 9.5 9.4 11.21

32.2 18.5 5.3 16.8 31.5 -3.20 16.25

7.7 6.2 5.5 6.4 3.4 7.8 8.37