QUESTION 6 (25 Marks) CLO CLO4 6. Marks 0 ( 3 14 5 3 (a) In order to finance it's project, an oil company is raising it's capitals by taking loan, selling bond and using internal company's profits. The costs of taking a bank loan, selling bond, and using internal profit are 6%, 15% and 8%, respectively. If a bank loan represents 35% of the total capitals, 50% for selling bond and 15% for using internal money, determine the company's hurdle rate. Given that the company risk premium is 10%. (3 Marks) (b) The same oil company in (a) above has a consession aggreement with host government of an oil field. The gross revenues, capital expenditures and operating expenditures are given in Table 6. The consession fiscal terms are: Government's royalty rate 10 %; Income tax rate - 30 %; Depreciation for CAPEX = 5-years, straight line, commencing when production begins. 7 Table 6: Consession fiscal terms for the cash flow Parameter Year 2 3 4 5 Field's Gross Revenue 150 250 450 350 (USD MIL) CAPEX (USD M.) 250 250 +00 OPEX (USD Mill) 30 35 50 40 250 200 35 35 (i) Determine the yearly net cash flow for the oil company. (14 Marks) (n) Determine the net present value (NPV) at the company's hurdle rate as calculated in (a) above. (5 Marks) (h) Explain the meaning of NPV results to the oil company