Wildcat Drilling is an oil and gas exploration company that is currently operating two active oil fields
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% 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.
- Questions
- Would shareholders of Wildcat be interested in the trade?
- Would debtholders of Wildcat be interested in the trade?
- If the debt were $100M (instead of $500M), would there be a conflict between shareholders and debtholders
Financial Accounting and Reporting a Global Perspective
ISBN: 978-1408076866
4th edition
Authors: Michel Lebas, Herve Stolowy, Yuan Ding