UMUC FIN630 homework 10

QUESTION

Read Chapter 12 in your text and view the short video capture for this chapter under the Content module “Excel templates & text chapter videos”Do practice problem 12-2 and check your solutionIndividual Homework: Do problem 12-5 and post by 11:59 PM ET on the last day of the sessionSecond group project (Valuing Conoco Phillips’ Acquisition of Burlington Resources, problem 8-13 on page 306) DUE at the end of the session.Post in your group area with the word FINAL in the titleParticipate in this week’s discussion of the issues raised by your instructorJ&B Drilling Company has recently acquired a lease to drill for natural gas in a remote region of the southwest Louisiana and southeast Texas. The area has long been known for oil and gas production, and the company is optimistic about the prospects of the lease. The lease contract has a three-year life and allows J&B to begin exploration at any time up until the end of the three-year term.J&B engineers have estimated the volume of natural gas they hope to extract from the leasehold and have placed a value of $25 million on it, on the condition that explorations begin immediately. The cost of developing the property is estimated to be $23 million (regardless of when the property is developed over the next three years). Based on historical volatilities in the returns of similar investments and other relevant will evolve over the next three years as shown in the figure on page 477.The risk-free rate of interest is currently 5%, and the risk-neutral probability of an uptick in the value of the investment is estimated to be 46.26%.a. Evaluate the value of the leasehold as an American call option. What is the lease worth today?b. As one of J&B’s analysts, what is your recommendation as to when the company should begin drilling?

ANSWER:

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