Gooringa Oil Announces That an Exploratory Well That It Has

question 44

Multiple Choice

Gooringa Oil announces that an exploratory well that it has sunk in a new area has shown the existence of substantial oil reserves. The exploitation of these reserves is expected to increase Gooringa's free cash flow by $100 million per year for eight years. If investors had not been expecting this news, what is the most likely effect on Gooringa's share price upon the announcement, given that Gooringa has 80 million shares outstanding, no debt, and an equity cost of capital of 10%?

• A)rise by $6.67
• B)no effect
• C)rise by $8.30
• D)rise by $5.78

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Definitions:

Interest-bearing Note

An interest-bearing note is a debt instrument in which the borrower agrees to pay the lender interest in addition to repaying the principal amount borrowed.

Interest Revenue

Income earned on investments like bonds, savings accounts, and other interest-bearing securities.

Note Duration

The length of time until a note payable or receivable is due, which determines its repayment schedule.

Face Value

The nominal or original value of a financial instrument as stated by the issuer, such as the amount paid at maturity for bonds.