Valuation is the estimation of an asset’s value, whether real or financial, based on variables perceived to be related to future investment returns, on comparison with similar assets, or, when relevant, on estimates of immediate liquidation proceeds (Pinto, Henry, Robinson, Stowe; 2010).
Correct valuation of real assets can present challenges to financial analysts. Different models can be used to arrive at the closest estimate of value and yet certain issues will always arise.
This case attempts to tackle two approaches in real asset valuation: Discounted Cash Flow (DCF) analysis and the issues surrounding such, as well as the Black-Scholes …show more content…
ASSUMED COST OF CAPITAL: 13%
Using above assumed cost of capital, below DCF valuation shows the total value of all MW reserves. A separate DCF valuation was conducted for each reserve, with the total value summing up to MW’s total PV of 473.5M (refer to Exhibit 1 for complete details of DCF analysis).
DCF of all MW Reserves
Proved Developed Reserves 383.84
Proved Undeveloped Reserves 40.79
Probable Reserves 41.47
Possible Reserves 7.42
Total Value of Reserves 473.51
DCF of Aggregated MW Projections
The sources of bias pertain to:
1. Cash Flow estimates were prepared by Amoco
2. Correct discount rate to be used (assumed rate was 13%, but it could be higher, which would then result to a lower PV for MW, and vice versa).
3. How would you structure an analysis of MW as a portfolio of assets in place and options? Specifically, which parts of the business should be regarded as assets in place and which as options? What kinds of options are present? Should this approach yield a higher or lower value than the DCF approach?
MW can be thought of as a combination of assets-in-place and options. Assets-in-place pertain to properties that already provide cash flow. In this case, proved