Question
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
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
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