Optimistic oil is an oil services company that reported after tax operating profits last year of $125 million on revenues of $1 billion. However, the firm benefited from high oil prices (averaging 100$barrel) during the course of the year. Oil prices have now dropped to 60$/barrel and your assessment of optimistic oils history suggests that every $1/barrel drop in the stock price costs them 1.25 million in after tax operating profits. If the firm is in stable growth, the production growing 1% a year in perpetuity and the business is in a competitive one (where firms earn their cost of capital of 6% over time), estimate the value of Optimistic oil today. Note, factor reinvestment needs in.

Select one:

1500 million

1808 million

1524 million

2500 million

2273 million

1250 million

2083 million

None of the possible answers

1042 million