EBF 304W Spring 2015 -Memorandum 2

50 points

Instructions: Utilize the provided template for formatting your memo; do not change any
50 points
of the margins, line spacing, or fonts. Completely answer the following question(s) in no
Instructions: Utilize the provided template or tables if they aid in comprehension any
more than 2 pages. You may utilize figuresfor formatting your memo; do not changeof your
of the margins, use graphs or fonts. in your answers, they following question(s) in
response. If youline spacing, or tables Completely answer the must be appropriately no
more than 2 pages. enough utilize figures or tables if they aid in comprehension of
captioned and clearYou maythat I can understand them (this means labeling axes, your
response. and so forth). Your memo must answers, they must be appropriately
variables, If you use graphs or tables in yourbe submitted in a single electronic file in pdf
captioned and clear enough that I can understand late (this means labeling axes,
file format. Late assignments will lose 10% per themday (e.g., late day 1 begins at 5:01pm
variables, date and ends you cant on the to class, your memo must be submitted via
on the dueand so forth). Ifat 5:00pm make it following day).
ANGEL in a single electronic file in pdf file format. Late assignments will lose 10% per
late day (e.g., late day 1 begins after class on the due date and ends at 5:00pm on the
Question 1 (50 points):
Your company is deciding whether to
following day).
purchase mineral rights to one of two plots of land in the Marcellus shale
region of West Virginia. The possible outcomes and terms of the leases
Question 1 (50 points):
Your company is deciding whether to purchase mineral rights to one of two plots
are provided in Table 1 below. To acquire the lease, the company has to
of land in the Marcellus shale region of West Virginia. The possible outcomes and
make an upfront are provided in Table 1 pay a To acquire of lease, the
terms of the leasesdown payment and thenbelow. percentage the the sale price
of the produced natural gas in down payment and then pay a percentage of
company has to make an upfrontroyalties to the lessor. The field size is the the
amount of gas produced natural gas each year to 3 years. You field size is
sale price of thein MMBtu produced in royaltiesfor the lessor. Theshould
assume that your company produced each year for 3 value decision maker,
the amount of gas in MMBtuis a risk-neutral expectedyears. You should assume
and that company is risk-neutral company is 15%.
that your the discountarate of your expected value decision maker, and that the
discount rate of your company is 15%.
Table 1: Projected lease terms, gas prices, and size of recoverable gas
Table 1: Projected lease terms, gas prices, and size of recoverable gas reserves.
reserves.
Down Payment ($)

Gas price ($/MMBtu)
Field Size (MMBtu/yr)

15%
50%
Maximum

$3.00

$13.00

Minimum

Lease B

$1,200,000
$250,000
Minimum

Lease A

Royalties per
MMBtu (% of price
going to lessor)

Maximum

95,000

350,000

The probabilities of probability estimates for field size and gas price. Analyze
You dont have good each of these outcomes is currently unknown. Analyze this
decision and convey to to management your recommendation in terms of the
this decision and convey management your recommendation in terms of the
strategy they should pursue given different beliefs about field size and gas price.
strategy they should pursue including a visual depiction of how their strategy
Include change in response to different beliefs about the future value of the
should visual depictions.
uncertain factors affecting this decision.