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Would shareholders of Wildcat be interested in the trade

    Assignment Instructions

    Assignment ID: FG133051075

    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.

    Required –

    1. Would shareholders of Wildcat be interested in the trade?

    2. Would debt holders of Wildcat be interested in the trade?

    3. If the debt were $100M (instead of $500M), would there be a conflict between shareholders and debt holders?

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