How would you structure an analysis of MW Petroleum

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MW Petroleum Corporation Case - STUDY QUESTIONS CASE MW PETROLEUM

1. Evaluate Amoco's and Apache's corporate objectives and strategies. Is it reasonable to expect that the MW properties are more valuable to Apache than to Amoco? What sources of value most plausibly account for the difference between buyer and seller?

2. Perform a DCF-valuation of the four components of MW Petroleum's reserves using both the APV-approach and the WACC-approach, and assuming that all properties are developed immediately. What are the correct discount rates to use in the valuation? You can assume a market risk premium of 7.4% and a marginal corporate tax rate of 35%. Is your estimate of the DCF-value of the reserves based on the case information more likely to be biased high or low? What are the sources of bias?

3. How would you structure an analysis of MW Petroleum as a portfolio of assets-in-place and options? Specifically, which parts of the business should be regarded as assets-in-place and which as options? What kinds of options are present? Should this approach yield a higher or lower value than the DCF-approach employed in the previous question?

4. Determine the value of the options identified in the previous question using the Black and Scholes options pricing model. Clearly map the real option characteristics to the parameters in the model and motivate all your input choices. What are your conclusions if you compare these values with the estimated DCF-values for the different reserve components?

The purpose of the MW Petroleum case is to value a subsidiary that Amoco wants to divest, based on the discounted cash flow approach, and to provide an introduction to real option valuation, which is our second valuation approach.

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Reference no: EM131879005

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Reviews

len1879005

2/26/2018 1:26:12 AM

Detailed Question: Please read the case(Attachment 2,3), Answer the questions( Attachment 1). summary the case briefly, answer study questions, give your final recommendation, and the logic and analysis supporting your recommendation. Need spreadsheet, details. Thanks. The purpose of the MW Petroleum case is to value a subsidiary that Amoco wants to divest, based on the discounted cash flow approach, and to provide an introduction to real option valuation, which is our second valuation approach.

len1879005

2/26/2018 1:26:05 AM

Guidelines for case analysis: The case report should write as an executive summary: summary the case briefly, answer study questions above, give your final recommendation, and the logic and analysis supporting your recommendation. (With a maximum of 5 pages, including exhibits). Using the information on the separate reserve components in the case exhibits, perform a DCF-valuation of MW Petroleum from the perspective of Apache based on both the WACC-approach and APV. Clearly motivate your input choices and also discuss what additional information you would need to improve the inputs given in the case, and why.

len1879005

2/26/2018 1:25:59 AM

In your analysis, I would like you to focus first on whether the deal makes sense from the perspective of the seller and the prospective buyer, Apache corporation. Think about this in terms of sources of value creation and value drivers. Finally, try to structure MW Petroleum's assets as a portfolio of assets in place and options. That is, identify the real options present in this investment opportunity for Apache, and conceptually discuss the underlying parameters and how they would affect the valuation. In your case reports, you do NOT need to value the real options described above. Focusing on the DCF-valuation is sufficient.

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