NewGrade Energy Inc Case Solution

2. The valuation through discounted cash flow involves a forecast of revenues for which price of crude oil and natural gas prices. Since, the prices of energy products are extremely volatile thereby the forecast of revenues may be questionable. The prices play a key role in the forecast of the revenues thereby free cash flows determination are subject to price variability. Moreover, another likely constraint may arise due to conducting a comparison with refinery companies for beta determination to estimate the cost of capital. The refinery companies may not be an accurate comparison since NewGrade is operating in up-gradation of heavy oil which is essentially an input provider for refineries. The capital structure of heavy oil upgraders may be different from the refineries thereby looking for oil upgraders beta for true comparison may be appropriate. However, in absence of upgrader data, supply chain partner or other industry participant data may be used as a close substitute. 

3. The cost of equity has been calculated using two scenarios using no debt and 25% debt in capital structure which makes debt to equity of 0.33. Data of publicly traded companies show that the average unlevered beta is 1.05 which may be a close proximation of beta of NewGrade. For calculation of levered beta which is with 25% debt and debt to equity of 33%. The formula in table 1 has been used to calculate the levered beta for NewGrade. The risk-free rate and risk premium has been 4.84% and 7.10% respectively. The capital asset pricing model has been used to determine the cost of equity for both scenarios.