Kwinana Explorations Ltd have just struck oil in Western Australia. Their share price jumps from $1 to $15.
a) Assume the required rate of return does not change and is 20 per cent. Assume investors had believed there was no chance of an oil strike and expected that the company would wind up at the end of the year. How large a liquidating dividend had they expected? If the company is now to be sold to a multinational oil company at the end of the year, how much do investors expect to get per share?
b) Using your answers from above part, calculate the expected return before and after news of the oil strike?
The question belongs to Finance and it discusses about expected rate of return and opportunity cost of capital concepts.
Total Word Count 55
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