ExxonMobil (Xom)
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?
To start with, a single company-wide cost of capital implies that the firm uses one general cost of capital as the discounting rate for all of the capital expenditures within its business operations irrespective of whether they come from different departments. The recommendation for Exxon Mobil is that it should not make use of a single company-wide cost of capital when analyzing capital expenditures for all of its business units. Instead, the company should make use divisional cost of capital for each business unit independently when undertaking an analysis for capital expenditures (California State University, n.d).
This follows from the consideration of aspect of difference in the levels of risks involved, in the different business units. For Exxon Mobil, as every business unit makes a consideration for investment prospects, it has to employ an interest rate that is the cost of capital to appraise and assess the impacts of expected cash flows in the different time-spans. Using a single company-wide cost of capital implies aggregating the risk of the whole company (California State University, n.d).
If Exxon Mobil uses the single company-wide cost of capital, then this rate will be too high for some of its business units...
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