Case Notes on MW Petroleum Corporation (A)

MWPetroleum.xlsx

RADR

market risk premium
	Licheng: This premium is taken from the NYU report .		Input Variables
risk-free rate
	Licheng: From Exhibit 10.		Calculation Variables
asset beta
	Licheng: Footnote b of Exhibit 2.	Cost of equity
Licheng: Assuming that Miller's equilibrium holds, this is the same as WACC.

		Total Real Option Values from proved undeveloped, probable, and possible reserves ($ Millions)
Input Variables				Time to Maturity (in years)
				5	6	7
Calculation Variables		volatility	0.3
			0.4
			0.5
			0.6
			0.7
		Aggregated MW Cash Flow Projections
	Year	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15
	Cash flow
	Terminal value
	Total Cash Flow
	Value from other opportunities (see case page 5)
	DCF value without options
	Total value w/o options
		Total value with options
				Time to Maturity (in years)
				5	6	7
		volatility	0.3
			0.4
			0.5
			0.6
			0.7
		% change in value between the firm with and without options
				Time to Maturity (in years)
				5	6	7
		volatility	0.3
			0.4
			0.5
			0.6
			0.7

Proved Undeveloped Reserves: Production and Cash Flow Projections
($ millions)
	year	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15
	Cash from operations
	Capital expenditures
	Extraordinary Cap Exp. in first 2 years
	Routine Cap Exp.
	Net Cash flow
	Terminal value
	Total net cash flow
	Calculation of Real Option Value
	Stike Price (X), discounted at risk-free rate							Input Variables
	Underlying Asset Value (S), at RADR
	Risk Free Rate							Calculation Variables
	T (in years)
	Sigma
	d1
	d2
	N(d1)
	N(d2)
	Call Option value
	Sensitivity Analysis of Option Value on volatility and Time to Maturity
			Time to Maturity (in years)
		0.0	5	6	7
	volatility	30%
		40%
		50%
		60%
		70%

Possible Reserves: Production and Cash Flow Projections
($ millions)
	year	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15
	Cash from operations
	Capital expenditures
	Extraordinary Cap Exp. in first 6 years
	Routine Cap Exp.
	Net Cash flow
	Terminal value
	Total net cash flow
	Calculation of Real Option Value
	Stike Price (X), discounted at risk-free rate							Input Variables
	Underlying Asset Value (S), at RADR
	Risk Free Rate							Calculation Variables
	T (in years)
	Sigma
	d1
	d2
	N(d1)
	N(d2)
	Call Option value
	Sensitivity Analysis of Option Value on volatility and Time to Maturity
			Time to Maturity (in years)
		0.0	5	6	7
	volatility	30%
		40%
		50%
		60%
		70%

Probable Reserves: Production and Cash Flow Projections
($ millions)
	year	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15
	Cash from operations
	Capital expenditures
	Extraordinary Cap Exp. in first 4 years
	Routine Cap Exp.
	Net Cash flow
	Terminal value
	Total net cash flow
	Calculation of Real Option Value
	Stike Price (X), discounted at risk-free rate							Input Variables
	Underlying Asset Value (S), at RADR
	Risk Free Rate							Calculation Variables
	T (in years)
	Sigma
	d1
	d2
	N(d1)
	N(d2)
	Call Option value
	Sensitivity Analysis of Option Value on volatility and Time to Maturity
			Time to Maturity (in years)
		0.0	5	6	7
	volatility	30%
		40%
		50%
		60%
		70%