1. Calculate the value added to the shareholders if they had the opportunity to invest in a stripper well project for $600,000. If oill sold at $30 a barre, it would pay a free cash flow of $150,000 per year and If oil could be sold for $40 a barrel it would have a free cash flow of $600,000 per year. There is an equal probability of each price At the end of the first year you could invest an additional $300,000 and increase free cash flow to $975,000 per year if the price remained at $40.00 per barrel and be $175,000 if it was $30.00 a barrel. If the price is $30 a barrel in the first year, the probability it goes to $40.00 for the second year of 20% and S40 per barrel price would be 80%, otherwise the percentages would be 10% remaining at $30 per barrel and 90% being $40 per barrel.
2. What is the cost of capital for a firm with 40,000 of S1000 bonds with a coupon rate of 5% due in 6 years that sells for S950 per bond, it has floatation costs of 4% of any new bond and can issue new debt at the present market rate, t has 100 par, 5% dividend preferred stock with a floatation cost of 8%, it has 1.000,000 shares of preferred outstanding it has 50,000,000 shares of common stock outstanding with floatation costs of 10%. It pays dridend of S300 pershare with no dividend growth rate. It has a beta of 14 and an equity premium of 5%. The risk free rate is 4% and the free cash flow is growing at 5% per annum. It needs to raise S2000000 in additional funds. Which avenue should it pursue and why?