Use the Information for the Question(s)below

question 18

Multiple Choice

Use the information for the question(s) below.
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.
-What is the expected payoff to debt holders with the speculative oil lease deal?

• A)$10 million
• B)$275 million
• C)$85 million
• D)$160 million

---

Definitions:

Qualified Investors

Individuals or entities that meet specific financial criteria set by regulatory authorities, allowing them to invest in certain complex and potentially riskier investments.

Leverage

The use of borrowed capital to increase the potential return of an investment, also referring to the ability to influence situations or people to achieve a particular outcome.

Management's Flexibility

The ability of a company's management to adapt to changes in the business environment, including altering strategies and operational processes.

Financing Decisions

Choices made by a company regarding the best methods to finance its operations or expansions, including equity, debt, or internal funds.