{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

10-1sol - PROBLEM 10-1 Given Available gas(MCF Price of...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
PROBLEM 10-1 Given Available gas (MCF) 50,000,000 Price of Gas (today) $14.03 per MCF Gas Price Next Year High $18.16 Low $12.17 Forward price for next year $14.87 Development cost per MCF $4.00 Debt (on the property) $450,000,000 Interest rate on debt 10% Debt maturity 1 year Asking price for Equity $50,000,000 Risk free rate of interest 6.0% Income tax rate 0.0% Option Exercise price/MCF $13.90 Solution Revenue (hedged) $743,500,000 Less: Development cost (200,000,000) Less: Interest expense $(45,000,000) EBT $498,500,000 Less: Taxes $- Net Income $498,500,000 Less: Principal Payment $(450,000,000) EFCF $48,500,000 Estimated value of the equity $45,754,717 High Price for Gas Low Price for Gas Revenue (Not hedged) $908,000,000 $608,500,000 Less: Development cost (200,000,000) (200,000,000) Less: Interest expense $(45,000,000) $(45,000,000) EBT $663,000,000 $363,500,000 Less: Taxes $- $- Net Income $663,000,000 $363,500,000 Less: Principal Payment $(450,000,000) $(450,000,000) EFCF $213,000,000 $(86,500,000) Calculating the risk neutral probabilities Risk Neutral Pbs Option Payout Product High price oil 45.1% $213,000,000 96,010,016.69 a. Hedging (with futures) analysis Since there is only one EFCF ( a sure value) and it is less than the $50 million asking price for the
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Background image of page 2
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Background image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}