Calculate cost of equity, cost of debt & cost of capital

1. For Gulf Oil, calculate its cost of equity, cost of debt, and its cost of capital. If you used a Beta number in your calculation be sure to indicate which firm’s beta you are using and why. Label each number that you used in determining these rates. (25 Pts.)
2. At the end of 1983 what is the value per share of Gulf Oil “Alive”? To do this you should determine the value of the free cash flows (FCF) that Gulf Oil will generate in 1983 when it is alive. Label each number that you used in your calculations. (Do not use the cost per barrel of oil approach in your calculations). (30 pts.) 3. Use an alternative approach in determining the value per share of Gulf Oil “Alive” at the end of 1983. Explain why this is a good proxy for the value of Gulf Oil. (5 pts.) 4. At the end of 1984 what is the value per share of Gulf Oil “Dead”? Gulf Oil did not explore for oil at all during 1984. Du Pont will sell off its reserves each year into the future. Label each number used in your calculation. You need to determine the value of the FCFs that Gulf Oil will generate under this strategy. This should give you the value of Gulf when it stops exploring for oil. (Do not use the cost per barrel of oil approach in your calculations.) (30 pts.)
5. What do you think should be the real value per share of Gulf Oil’s stock when firms are bidding for Gulf Oil on March 5, 1984? (5 pts.)

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