Principles of Financial Management. Reasons against Use of Company-Wide Cost of Capital

Mini-Case 9-2 (Chapter 9)
ExxonMobil ( XOM) is one of the half- dozen major oil companies in the world. The firm has four primary operating divisions ( upstream, downstream, chemical, and global services) as well as a number of operating companies that it has acquired over the years. A recent major acquisition was XTO Energy, which was acquired in 2009 for $ 41 billion. The XTO acquisition gave ExxonMobil a significant presence in the development of domestic unconventional natural gas resources, includ-ing the development of shale gas formations, which was booming at the time. Assume that you have just been hired to be an analyst working for ExxonMobil’s chief financial officer. Your first assignment was to look into the proper cost of capital for use in making corporate investments across the company’s many business units.
a. Would you recommend that ExxonMobil use a single company- wide cost of capital for analyzing capital expenditures in all its business units? Why or why not?
b. If you were to evaluate divisional costs of capital, how would you go about estimating these costs of capital for ExxonMobil? Discuss how you would approach the problem in terms of how you would evaluate the weights to use for various sources of capital as well as how you would estimate the costs of individual sources of capital for each division.
Instructions: In 600-750 words in length (not including title page and reference page), respond to the case below. Your paper must include at least two scholarly journal references (in addition to your book: Keown, A. J., Martin, J. D., & Petty, J. W. (2014). Foundations of finance: The logic and practice of financial management, (9th ed.). Upper Saddle, NJ: Pearson). Refer to the Writing Assignment Grading Criteria below for requirements in content, organization, writing style, grammar and APA 6.0 format
Your assignment will be graded according to the following Writing Assignment Grading Rubric:

Guidelines
Writing Assignment Requirements

Content (60%)
Response demonstrate a clear understanding of the key elements of assignment questions.
Responses thoroughly cover the elements in a substantive manner.
Response demonstrates critical thinking and analysis.
Content is complete and accurate.
Introduction and conclusion provides adequate information on the given topic.

Organization (20%)
Paper structure is clear and easy to follow.
Ideas flow in a logical sequence.
Introduction provides a sound introduction to the topic and previews major points.
Paragraph transitions are logical and support the flow of thought throughout the paper.
The conclusion thoroughly reviews the major points.

Writing Style,
Grammar, APA Format (20%)
Sentences are well constructed, complete, clear, and concise.
Words used are specific and unambiguous.
The tone is appropriate to the content and assignment.
Grammar, spelling and punctuation are correct.
APA guidelines (6th edition) are followed, such as title page, headers, citations, references, etc.
Effective use of aids, such as sections, summaries, table of contents, indices, and appendices (if appropriate)