Essay on Mw Petroleum Case Study

2968 Words May 6th, 2010 12 Pages
In less than five, double-spaced, typewritten pages, plus any exhibits, please answer the following questions about MW Petroleum Corp. This assignment is worth a maximum of 100 points. 1. (10 points.) Apart from any quantitative analysis, are there any reasons to anticipate that Apache Corporation’s acquisition of MW Petroleum might be a positive net present value activity for Apache, for Amoco? Explain. This looks like an attractive deal for both parties. Amoco does many things well, but managing smaller, marginally productive oil and gas fields apparently isn’t one of them. This is a chance to unload some properties that because of their high cost structure, Amoco can’t manage profitably. Apache, on the other hand, has low costs and is …show more content…
Overhead As discussed in the Diamond Chemical case, overhead does not mean fixed. Variable overhead is relevant to valuing MW, fixed overhead isn’t. Absent information to the contrary, it seems appropriate to consider these costs variable. This is a little tricky. The exhibits calculate profit contribution based on financial book reporting numbers. They subtract financial book DD&A to calculate net income before taxes, and then they subtract total income taxes (or more commonly, provision for taxes) to calculate profit contribution (or more commonly, net income after taxes). Finally, the exhibits determine cash flow from operations by adding back financial book accounting and deferred taxes, both of which are non-cash charges. The resulting cash flow from operations is correct. This is made more confusing by the fact that, contrary to most investment opportunities, deferred taxes are negative every year, making current taxes paid higher than provision for taxes. This also means that the adding back of deferred taxes actually reduces cash flow from operations. Note, too, there is a little circularity going on here because the value of MW and the level of DD&A expenses depend on one another. The authors of the exhibits have sidestepped this problem by basing depreciation on a ballpark number for the value of the business. With more information about the depreciation methods employed, we could eliminate this circularity.

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