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

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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

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