A U.S.-based crude oil producer, Bottom of Barrel (nicknamed BB King in the fracking community) engages in fracking to produce oil. Fracking is a high-tech but expensive method of oil drilling, in which high-pressure jets of water (often mixed with a concoction of toxic chemicals) are injected into rocks deep underneath the earth's surface. This creates fractures in rock formations that have oil droplets trapped within. The fractures allow the oil droplets to flow out of the rocks. And, the pressurized water pushes them to the surface.

With the collapse of demand for oil. Low oil prices (currently, WTI a grade of oil produced in the US, is trading at $20/barrel), makes fracking uneconomical because of the high cost of production. As a result, BB King is facing tremendous financial strains. To keep the company afloat, BB Kings CFO, Jackie Townsend decided to raise cash by issuing $500 MM with a new senior unsecured bond that will mature in 10 years. On the day of issuance, the price of the bond is set at par (i.e., principal = $100), and the companys price-talk indicates that the annual coupon rate is offered at 7.5%. The bond will pay semi-annual coupons (i.e., every six months) similar to most corporate bonds.

Question

This question is based on Exhibit 1 (above). A bond analyst at a major fixed-income bond fund, Ashley Snowden, is considering purchasing the bond for her fund. She developed the following three scenarios for BB King bond:

Scenario 1: though at a much-depressed price ($20/barrel), the present supply and demand in the oil market have come into balance. And the current market condition, therefore, remains stable. Under Jackie Townsends (the CFO) careful stewardship of BB Kings finances over the years, BB King has a stronger balance sheet than its competitors in the fracking industry. If the bond issuance is successful, Ashley believes the company can survive 5 years and remain solvent. Unfortunately, at these oil prices, the market will eventually force BB King to shut down. At which point, the company will likely liquidate, and only pay back 60% of the principals owed on its bonds. This scenario has a 60% probability. The comparable yield to maturity for the BB King bond is 4% under this scenario.

Scenario 2: the price war between Russia and OPEC, both large oil-producing countries, exacerbates. That is, in a game of chicken both Russia and OPEC INCREASE oil production as market demand collapses. In this scenario, the oil prices will crash to the single-digit price per barrel (i.e., < $10/barrel) within 2 years. At that point, BB King will enter bankruptcy, and will only pay back 40% of the principals owed on its bonds. This scenario has a 10% probability, and the YTM for the BB King bond is 3% under this scenario.

Scenario 3: world recovers relatively quickly from the current crisis. Business activities rebound and oil demand improve along with the global economy. Oil price recovers to above $40/barrela breakeven price for BB King. Under this scenario, BB King will survive and remain solvent for the next 10 years. This last scenario has a 30% probability, and the comparable YTM for the BB King bond is 6% under this scenario.

What is the intrinsic value (or the expected price) of the bond given Ashleys scenario analysis?

A. $69.43

B. $43.47

C. $88.30

D. $111.16

Appreciate the help.

Thanks.