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% chance 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.

1. Questions
2. Would shareholders of Wildcat be interested in the trade?
3. Would debtholders of Wildcat be interested in the trade?
4. If the debt were $100M (instead of $500M), would there be a conflict between shareholders and debtholders

Answer rating: 100% (QA)

1The shareholders of Wildcat would be interested in the trade if the expected value of the new oil a... View the full answer