Question

Carbondale Oil announces that a well that it has sunk in a new oil province has shown the

existence of substantial oil reserves. The exploitation of these reserves is expected to increase
Carbondaleʹs free cash flow by $100 million per year for eight years. If investors had not been
expecting this news, what is the most likely effect on Carbondaleʹs stock price upon the
announcement, given that Carbondale has 80 million shares outstanding, no debt, and an equity
cost of capital of 11%?
A) no effect
B) rise by $5.15
C) rise by $6.43
D) rise by $7.72

Answer 1

C) rise by $6.43

Step-by-step explanation:

This due to the fact that investors had not expected the news and it is favorable to them.