Case Analysis on Capital Structure Pioneer Petroleum
Application of Capital Structure, Costs of Capital for Multiple Division firms
Case Analysis: Pioneer Petroleum Corporation (PPC).1
Submitted by: Joseph Donato N. Pangilinan, FICD
Date Presented: April 12, 2012
Introduction:
This landmark case seeks to break the risk-reward trade off involved in calculating Capital Cost. The object of the solution must be to minimize project risks while maximizing project opportunities available. We want a rate and a rating system that does not unnecessarily reject “the best available projects – i.e. highest net positive free cash-flows at that time.” Particularly in times of excess capacity, this will marginally contribute to increasing company wide yields, but will not necessarily match the company-wide yield imposed by investors.
History of the Company and Background of the Case:
Sometime in July 1991, one of the critical problems confronting management and the board of Pioneer Petroleum Corporation, hereinafter referred to as Pioneer, is about Capital Budgeting; specifically they needed to determine the Minimum Acceptable Rate of Return, or MARR, on new capital investments. Their capital budgeting approach was to accept all proposed investments with a positive net present value when cash-flows are discounted at such appropriate cost of capital.
Formed in 1924 through mergers of several formerly independent firms operating in the oil refining, pipeline transportation, and industrial chemical fields, pioneer Pioneer did vertical, horizontal, and backward integrations into exploration and production of crude oil, marketing refined petroleum products, plastics, agricultural chemicals, and later diversified into real estate development. In 1985 Pioneer restructured further into hydrocarbon-based oil, gas, coal, and petrochemicals.
Statement of the Problem:
What rate or rating system will consider specific, inherent risks of divisions and operating sectors AND consider benefits ascribed to the
Case Analysis: Pioneer Petroleum Corporation (PPC).1
Submitted by: Joseph Donato N. Pangilinan, FICD
Date Presented: April 12, 2012
Introduction:
This landmark case seeks to break the risk-reward trade off involved in calculating Capital Cost. The object of the solution must be to minimize project risks while maximizing project opportunities available. We want a rate and a rating system that does not unnecessarily reject “the best available projects – i.e. highest net positive free cash-flows at that time.” Particularly in times of excess capacity, this will marginally contribute to increasing company wide yields, but will not necessarily match the company-wide yield imposed by investors.
History of the Company and Background of the Case:
Sometime in July 1991, one of the critical problems confronting management and the board of Pioneer Petroleum Corporation, hereinafter referred to as Pioneer, is about Capital Budgeting; specifically they needed to determine the Minimum Acceptable Rate of Return, or MARR, on new capital investments. Their capital budgeting approach was to accept all proposed investments with a positive net present value when cash-flows are discounted at such appropriate cost of capital.
Formed in 1924 through mergers of several formerly independent firms operating in the oil refining, pipeline transportation, and industrial chemical fields, pioneer Pioneer did vertical, horizontal, and backward integrations into exploration and production of crude oil, marketing refined petroleum products, plastics, agricultural chemicals, and later diversified into real estate development. In 1985 Pioneer restructured further into hydrocarbon-based oil, gas, coal, and petrochemicals.
Statement of the Problem:
What rate or rating system will consider specific, inherent risks of divisions and operating sectors AND consider benefits ascribed to the