Question
Consider the junior gold mining firm Pure Gold, which expects to extract 5,000 ounces of gold next year, and pay out a liquidating dividend. The
Consider the junior gold mining firm Pure Gold, which expects to extract 5,000 ounces of gold next year, and pay out a liquidating dividend. The firm has zero-coupon debt with a face value of $3.57 million, it pays a 40% corporate tax rate on net income above its $4 million depreciation expense and its interest expense equal to the face value minus the present value of the debt, and it has extraction costs of $400 per ounce. Management estimates the annual expected return, volatility, and skewness for gold to be 10%, 20%, and 0 respectively. The current one-year forward price of gold is $1,260 per ounce and the convenience yield on gold is currently 0. The risk-free rate is 5% per year (CCR). (Assume all revenues and costs occur at the end of the year.)
Hedged & Unhedged value of the firm, debt & equity.
Spot Price of gold
Binomial model for gold
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