Wildcat Drilling is an oil and gas exploration company that is currently operati

Question

Wildcat Drilling is an oil and gas exploration company that is currently operating two active oil fields with a market value of? $200 million each. ? Unfortunately, Wildcat Drilling has? $500 million in debt coming due at the end of the year. A large oil company has offered Wildcat drilling a highly? speculative, but potentially very? valuable, oil and gas lease in exchange for one of their active oil fields. If Wildcat accepts the? trade, there is a? 10% chance that Wildcat will discover a major new oil field that would be worth? $1.2 billion, a? 15% that Wildcat will discover a productive oil field that would be worth? $600 million, and a?75% chance that Wildcat will not discover oil at all.

What is the overall expected payoff to Wildcat from the speculative oil lease? deal?

a. $275 million

b. ?$360 million

c. ?$160 million

d. ?$85 million

Explanation / Answer

Option A

overall expected payoff = Probability * Debt value

overall expected payoff = 0.10 * $500 + 0.15 * $500 + 0.75 * $200

overall expected payoff = $275 Million

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