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Valuing an american option: J & B Drilling Company has recently acquired a lease to drill for Natural gas in the remote region of southwest Louisana and southeast Texas. The area has long been known for oil and gas production, and the company is optismistic about the prospects of the lease. The lease contract has a three-year life and allows J &B to begin exploration at any time up until the end of the three-year term. J & B's engineers have have estimated the volume of the natural gas they hope to extract from the leasehold and have placed a value of $25 million on it, on the condition that explorations begin immediately. The cost of developing the property is extimated to be $23 million (regardless of when the property is developed over the next three years). based on the historical volatilities in the returns of the similar investments and other relevant information, j & B's analysts have estimated that the value of the investment opportunity will evolve over the next three years. The risk-free rate of interest is currently 5%, and the risk-natural probability of an uptick in the value of the investment is estimated to be 46.26%. Evaluate the value of the leasedhold as an American call option.What is the lease worth Today? As one of J & B's analysts, what is your recommendation as to when the company should begin drilling?
Briefly explain the following statement: The standalone risk of an individual corporate project may be quite high, but viewed in the context of its effect on stockholders’ risk, the project’s true risk may be much lower.
Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $204,000, has a four-year life, and requires $66,000 in pretax annual operating costs. Calculate the EAC for both conveyor belt sy..
You currently own 6 percent of the 2 million outstanding shares of Webster Mills. The company has just announced a rights offering with a subscription price of $50. One right will be issued for each share of outstanding stock. This offering will prov..
Landmark Coal operates a mine. During July, the company obtained 500 tons of ore, which yielded 250 pounds of gold and 63,700 pounds of copper. The joint cost related to the operation was $500,000. Gold sells for $325 per ounce and copper sells for $..
The common stock of Eddie's Engines, Inc. sells for $45.08 a share. The stock is expected to pay $3.50 per share next year. Eddie's has established a pattern of increasing their dividends by 5.6 percent annually and expects to continue doing so. What..
Suppose a European call option to buy a share for $100.00 costs $5.00. The stock currently trades for $97.00. If the option is held to maturity under what conditions does the holder of the option make a profit? Note: ignore time value of money.
Rodney Ruxin's Legal Services is raising capital to open a new law office in southern California. The project has an initial start up cost of $752,995. The firm maintains a debt-equity ratio of 0.50 and has a flotation cost of debt of 6.8 percent and..
If a bond is selling on the open market at $960 is it selling at a premium or discount? List 2 factors that might contribute to this selling price. What is the value today of a bond with the below attributes? What is the value of $50,000 invested at ..
Chuck Brown will receive from his investment cash flows of $3,175, $3,460, and $3,830 at the end of years 1, 2 and 3 respectively. If he can earn 7.5 percent on any investment that he makes, what is the future value of his investment cash flows at th..
Explain what is meant by the clientele effect. Explain what is meant by the informational content of dividend policy. Explain what is meant by the signaling effects of dividend policy.
What kind of a merger was it? How well is it working from the perspectives of the various stockholders? As far as you are able to determine, what factors are contributing to the success or lack of it?
You are considering purchasing a new automobile that will cost you $28,000. The dealer offers you 4.9% APR financing for 60 months (with payments made at the end of the month). Assuming you finance the entire $28,000 through the dealer, what is your ..
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