Consider the junior gold mining company, SKGX Inc, which expects to extract 100,000 ounces of gold next year (after which the mine will be exhausted). The price of gold is assumed to be either $1,000 or $1,500 per ounce next year. The forward price is $1,300, the risk-free rate is 5% per year EAR, and extraction costs are $500 per ounce. Assume that there are no market frictions. a. What is the total value of SKGX? b. Suppose that the company has zero-coupon debt with face value $55 million that comes due next year. What are the values of debt and equity when (i) the firm hedges and (ii) does not hedge the gold price? 2. Canadian Petroleum has reserves of 1 million barrels of oil to be extracted in the coming year. (For simplicity, assume they can be sold at the year-end price.) The current oil price is $47 per barrel and the cost of extraction is $30 per barrel. The risk-free rate is 5% per year (EAR), the convenience yield for oil is assumed to be 2% per year (EAR), and the volatility for oil is 30% per year. CP will face financial distress if its cash flow is below $15 million. a. What cash flow would CP receive if it hedges completely using maturity matched forward contracts? b. What is the minimum quantity to hedge using maturity matched forward contracts such that financial distress is avoided?