Finance Assignmnt 2 Edited.docx

CORPORATE FINANCES ASSIGNMENT#: 2 ID

FULL NAME WASIQ IFTHIKHAR SAADAN UL HAQ ASAD RIAZ ADEEL

SUBMITTED TO: MS GUL RUKH DATE OF SUBMISSION: 2ND MARCH, 2019 SESSION OF SUBMISSION:

FOR GRADING: COMMENTS:

MARKS SECURED:

Exxon Mobil Corporation Vision Exxon Mobil Corporation is committed to being the world's premier petroleum and petrochemical company. To that end, we must continuously achieve superior financial and operating results while simultaneously adhering to high ethical standards.

Mission Energy is fundamental to the world economies. Improving living standards around the global requires affordable, reliable energy. Providing this energy is an enormous challenge one that must be met practically safely, and in an environmentally and socially responsible manner.

History Exxon Mobil Corporation, doing business as ExxonMobil, is an American multinational oil and gas corporation headquartered in Texas. It is the largest direct descendant of John D. Rockefeller's Standard Oil Company, and was formed on November 30, 1999 by the merger of Exxon (formerly the Standard Oil Company of New Jersey) and Mobil (formerly the Standard Oil Company of New York). The world's 10th largest company by revenue, ExxonMobil from 1996 to 2017 varied from the first to sixth largest publicly traded company by market capitalization. The company was ranked ninth globally in the Forbes Global 2000 list in 2016. ExxonMobil was the second most profitable company in the Fortune 500 in 2014. ExxonMobil is the largest of the world's Big Oil companies, or super majors, with daily production of 3.921 million BOE (barrels of oil equivalent); but significantly smaller than a number of national companies. In 2008, this was approximately 3 percent of world production, which is less than several of the largest state-owned petroleum companies. When ranked by oil and gas reserves, it is 14th in the world—with less than 1 percent of the total. ExxonMobil's reserves were 20 billion BOE at the end of 2016 and the 2007 rates of production were expected to last more than 14 years. With 37 oil refineries in 21 countries constituting a combined daily refining capacity of 6.3 million barrels (1,000,000 m3), ExxonMobil is the largest refiner in the world.

Stock price: US$85.19 CEO: Darren Woods Headquarters: Texas, United States Revenue: 237.1 billion USD Number of employees: 69,600

Financial Data Value of equity = $360085.580 million Value of debt = $48549 million Total value = value of debt + value of equity Total value = 48549 + 360085.580 Total value =$408634.58

WACC (Weighted average cost of capital) Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is respectively weighted. All sources of capital, including common stock, preferred stock, bonds and any other long-term debt, are included in a WACC calculation. A firm’s WACC increases as the beta and rate of return on equity increase, because an increase in WACC denotes a decrease in valuation and an increase in risk. WACC= WeKe + WdKd (1-t) +WpKp Ke = cost of equity. KD = cost of debt. E = market value of the firm’s equity. D = market value of the firm’s debt.

V=E+D E/V = percentage of financing that is equity. D/V = percentage of financing that is debt. Tc = corporate tax rate.

Weight of equity = E / (E+D) Weight of equity = 360085.580 / (360085.580 + 42549) Weight of equity = 0.894

Weight of debt = D / (E+D) Weight of debt = 42549 / (360085.580 + 42549) Weight of debt = 0.10567 Cost of equity There are two ways a company can raise capital: debt or equity. Debt is cheap, but the company must pay it back. Equity does not need repaid, but it generally costs more than debt due to the tax advantages of interest payments. Even though the cost of equity is higher than debt, equity generally provides a higher rate of return than debt. Analysts calculate the cost of equity with the dividend growth model and the capital asset pricing model. Risk free rate from the given data is 0.03115, Market premium is 6% and beta is 0.8. But here we use CAPM.

Formula of CAPM Ra = Expected return on a security Rrf = Risk-free rate Ba = Beta of the security Rm = Expected return on market Risk Premium = (Rm – Rrf)

Risk Free Rate + Beta [Market Return Premium] KE= 0.0315+ 0.81(0.06) KE= 8.01%

Cost of debt Cost of debt is the interest a company pays on its borrowings. It is expressed as a percentage rate. In addition, cost of debt can be calculated as a before-tax rate or an after-tax rate. Because interest is deductible for income taxes, the cost of debt is usually expressed as an after-tax rate. 1.4125% WACC = WeKe + WdKd (1-t) +WpKp =360085.580 (8.01) + (0.10567)( 1.4125%) (1-5.69%)+(0) WACC = 7.32%

Explanation Because it costs money to raise capital. A firm that generates higher ROIC % than it costs the company to raise the capital needed for that investment is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases, whereas a firm that earns returns that do not match up to its cost of capital will destroy value as it grows.