Pioneer Petroleum
Pioneer Petroleum, in the midst of restructuring their capital budgeting procedures, was debating over how their divisional cost of capital rates should be determined. Their two methods included a single cost corporate approach or a multiple divisional hurdle approach to capital. These rates were to be used in evaluating projects and allocating investment funds among divisions. The divisional rate would reflect the risks innate in each of the economic divisions where the company's principal operating subsidiaries worked. By working with this assumption, single rate supporters claim that all projects should be based on a single rate average, taken from each division. For example if the company's rate is 10% then every future project should be subject to this rate regardless of the sector. Supporters of multiple discount rates had calculated these numbers for several periods and consistent
Would they be given their own division or under a separate division such as high risk? We believe, along with the multiple rate supporters, that single rates do in fact give high-risk divisions an advantage. The difference was attributed to the fact that Pioneer benefit from its built in asset diversification. This will also open the company up to more growth opportunities in sectors the company is almost non-existent in. For example, tankers have been known to be devastating to companies in recent years, yet under a multiple rate they would be subject to an extremely low transportation rate. In order to correct the differences in cost of capital numbers it was proposed that these "diversification premiums" be allocated back to the overall costs and subsequently deducted from the multiple rates. ly found that their weighted average, when compared to each sector, exceeded the company's overall average cost of capital. For example, it was unclear as to whether all environmental projects would have the same rate, or a rate according to its division. ------------------------------------------------------------------------**Bibliography**. It is our belief that multiple rates will give each division a fair advantage for allocation of funds in future pr!ojects. Single rate supporters contended that funds should be used in those projects with the highest returns. Pioneer may already have a railroad due to its extreme vertical integration. They went on to claim that those arguing for a multiple rate, were those that could not compete effectively for new funds. If the cost for British Petroleum to transport the coal is $1 million and for Pioneer the cost is $500,000 then this difference should be allocated back to the sectors appropriate estimations. The average cost of capital for low risk investments was found to be relatively high. Furthermore, it is our contention, that without balances of low-risk investments, the company will not be able to compete in a time of substantial economic slow down.
Common topics in this essay:
British Petroleum,
Pioneer Petroleum,
cost capital,
single rate,
average cost capital,
rate supporters,
average cost,
single rate supporters,
multiple rates,
pioneer petroleum,
multiple rate,
Corporation Question,
overall average cost,
supporters single,
capital rates,
common stocks,
|
Acceptance Essays
