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

---

Definitions:

Coupon Bond

A debt security that pays the holder a fixed interest rate (coupon) over a specified period until its maturity.

Indenture Agreement

A formal contract between a bond issuer and a bondholder that specifies the terms of the bond.

Call Provision

A feature of a bond that allows the issuer to repay the bond before its maturity date.

Debenture Agreement

A legal document that specifies the terms of a bond issue, promising repayment of borrowed money plus interest at fixed intervals.