Encana Corporation
- Submitted by: fitzkayla
- Views: 455
- Category: Politics: Economics
- Date Submitted: 02/09/2014 10:35 AM
- Pages: 3
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The WACC that has been calculated suggests that EnCana Corporation should accept any project with an expected rate of return or “hurdle rate” that is greater than 14.8% if that project has a similar level of risk to that of the overall firm. The company should considering calculating the cost of capital for different individual projects, as every project has a different anticipated level of risk. Though it is not a precise method of calculation, this could be done by subtracting from the WACC of the overall firm is the project is expected to have a low-risk level, such as continuing to excel in the sale of natural gas. The opposite would occur for a project of a high-risk level, such as selling in a foreign country.
Another way of calculating the cost of capital for a project would be to look at other companies that are doing something similar to your ideal project. Using the financial information and the beta from these companies, EnCana may be able to predict an appropriate WACC to help decide is a project is feasible.
If EnCana hopes to pursue projects such as exploration and drilling, or oil production from oilsands, they can calculate their risk factor through comparison to other corporations that special in this type of work.
Calculations
In order to determine which numbers were needed for my calculations, I first looked at the equation for the weighted average cost of capital (WACC). Knowing that I needed the required return of EnCana’s debt financing, the tax adjustment for the interest expense, the cost of equity, and the total amounts of both debt and equity, I found numbers that there available in the case study that could direct me to the missing parts of the equation that I required.
To determine the weighting of both debt and equity, I first acquired the amount of debt from Exhibit 3, and was able to calculate the amount of equity from the third note on Exhibit 1. With knowing the total capital and the individual amounts of debt and equity, I...
Another way of calculating the cost of capital for a project would be to look at other companies that are doing something similar to your ideal project. Using the financial information and the beta from these companies, EnCana may be able to predict an appropriate WACC to help decide is a project is feasible.
If EnCana hopes to pursue projects such as exploration and drilling, or oil production from oilsands, they can calculate their risk factor through comparison to other corporations that special in this type of work.
Calculations
In order to determine which numbers were needed for my calculations, I first looked at the equation for the weighted average cost of capital (WACC). Knowing that I needed the required return of EnCana’s debt financing, the tax adjustment for the interest expense, the cost of equity, and the total amounts of both debt and equity, I found numbers that there available in the case study that could direct me to the missing parts of the equation that I required.
To determine the weighting of both debt and equity, I first acquired the amount of debt from Exhibit 3, and was able to calculate the amount of equity from the third note on Exhibit 1. With knowing the total capital and the individual amounts of debt and equity, I...