Pioneer Petroleum

1607 words, 7 pages

Intro Sample...

The market for this chemical had been growing, and with the new regulations, its market was expected to reach exponential growth. In 1991, Pioneer’s management met in July of 2001 and was trying to decide between using single or multiple minimum acceptable cutoff rates. Those supporting the use of a single target rate contended that the stockholders of Pioneer expected the company to invest their funds in the highest return projects available. They suggested that the affiliates backing the multiple rates were those that were unable to compete effectively for new funds when measured against the corporate group’s actual cost of capital. The divisional costs of capital proponents argued that a single company-wide cost of capital subsidized the higher risk divisions at the expense of the lower risk divisions. Because the cost of capital was too high for the low risk divisions, too few low risk investments were made. In the high risk divisions, too much investment occurred because the hurdle rate was too low. The proponents also argued that the company-wide cost of capital was too low, and that investments should be required to earn at least as much as an investment in common stocks. If Pioneer was serious about competing over the long run, it was essential to relate internal target rates of return to the individual businesses.

Major Problems

PPC has two substantial problems that obviously interfere with the goal of a firm to maximize shareholder wealth. The first and the most alarming is that PPC has been calculating their weighted average cost of capital incorrectly. This miscalculation has subjected PPC to more risk and has significantly hindered the company’s ability to make appropriate investment decisions. This has also subjected PPC to accepting investment decisions that clearly should not have been included within their View More »

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