Analyzing Capital Expenditure for XOM Companies
A.
I would not acclaim Exxon Mobil for using a single company’s full cost of capital to gauge its capital expenditure in all of its business entities. The whys and wherefores for this are that when an organization employs a company- full cost of capital, it will have a habit of overestimating the net present value (NP V) of a project. The net present worth is the variance between the current value of money entries and the current value of money outflows over a specified period of time. This propensity of incorporating the net present value attitude to assign capital crosswise to the divisions in the firm will hence lead to the overestimation of the net current value of projects, which is more uncertain than the distinctive company’s project sketch. The net present worth may result in either overestimation or underestimation, mainly in divisions. (Delgado, 2016).
The use of company-wide capital costs may also lead to alterations in the company, precisely disturbing the investment strategy of the organization. It is good to know that capital schemes require a lot of investment and future commitments, and any inappropriate resolution may lead to extended financial term fatalities for the company, which can ultimately prejudice the survival of the company. The main tenacity of capital ventures is to add value to the company, which can be observed through changes in regular prices over a period of time. (Goel, 2015).
The use of appropriate cost of capital is an imperative aspect and can differ from the company’s division policy to the other divisions, but the best tactic is to use the more operative cost of capital that is established on the more active expenditure of money that is based on the particular company’s threat level for division.
Exxon Mobil should value its developments using a concession ratio which will be indomitable by the jeopardy features of schemes that will be commenced by the business’s diverse separations. A company-wide source of capital also generates the forfeiture of value as a result of the misconception about the weighted average cost of capital (W A CC), particularly in the framework where Exxon Mobil attained XTO energy. Since the company is undertaking expansion by obtaining XTO energy, it is most likely to experience irregular incomes resulting from the purchase and thus may lead to loss of worth of the Exxon Mobil arcade equity. Consequently, this means that the reduction of money flows using a company-wide cost of capital is unfortunate, especially if the venture of the corporation varies regarding the risk concerning the company’s other assets. (Goel, 2015).
B.
In the estimation of cost of capital for Exxon Mobil Company, estimates of the Exxon Mobil money flows, and estimates of accurate weighted average price of capital (W A CC) in each division for which the cash flows will be discounted are needed and I will use the discount cash flow technique to get the estimates. The cost of capital consists of the value of each capital resource.
To ascertain the weights to allot to the respective sources of capital. I would evaluate the masses established on the origins of money used by the company. The capital resources could be either from the cost of Debt, cost of preferred stock, or value of equity. It is then easy to define the after-tax as all the debt dispersed to any precise division is used to compute the cost of debt. The average value of the indebtedness for any specific section is resolute, and they are accustomed to tax influence to define the after-tax cost of debt. The price of fairness is created on the value assigned to the corporate stock that can either be indomitable through the surplus concession model or through the capital asset pricing model (C A P M). The capital asset pricing model is the most ideal for defining the cost of equity. I would then allocate the weights establishing on the arcade ethics of the bases of capital used by the company. However, if all arcade ethics of the sources of money are not eagerly obtainable, I would use the manuscript standards for the debt and market values for equity.
To estimate the individual costs of capital for each division, I would undertake that all the company’s divisions employ either debt or Equity as their source of financing. The value of equity is the rate that the firm stakeholders would anticipate obtaining from funding in the firm’s stock. The approximation of the cost of investment is problematic because it does not contain a contractually well-defined return; I would consequently smear the capital asset pricing model to conclude on the cost of capital to the firm’s division. To govern the value of debt, this is the rate of profit to the organization’s creditors for the money lent. I would then establish the cost of debt by approximating the market prerequisite rate of return using the gain to maturity of the company’s debt. ( Delgado, 2016).
Reference
Goel, S. (2015). Capital budgeting
Delgado, C. M. J. (2016). Fiscal Policy in a Financially and Economically Interconnected World: Essays on Financial Sector Taxation and Regional Public Expenditure. Berkeley, CA.
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Question 
Analyzing Capital Expenditure for XOM Companies
ExxonMobil ( XOM) is one of the half-dozen major oil companies in the world. The firm has four primary operating divisions ( upstream, downstream, chemical, and global services) as well as a number of operating companies that it has acquired over the years. A recent major acquisition was XTO Energy, which was acquired in 2009 for $ 41 billion. The XTO acquisition gave ExxonMobil a significant presence in the development of domestic unconventional natural gas resources, including the development of shale gas formations, which was booming at the time. Assume that you have just been hired to be an analyst working for ExxonMobil’s chief financial officer. Your first assignment was to look into the proper cost of capital for use in making corporate investments across the company’s many business units.
a. Would you recommend that ExxonMobil use a single company-wide cost of capital to analyze capital expenditures in all its business units? Why or why not?
b. If you were to evaluate divisional costs of capital, how would you go about estimating these costs of capital for ExxonMobil? Discuss how you would approach the problem in terms of how you would evaluate the weights to use for various sources of capital, as well as how you would estimate the costs of individual sources of capital for each division.