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Deepwater Energy Exploration LLC (ticker: DEEP) announces that a test well that it has sunk...

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Finance

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Deepwater Energy Exploration LLC (ticker: DEEP) announces that a test well that it has sunk in a new exploration block in the Gulf of Mexico has shown the existence of substantial oil reserves. The exploitation of these reserves is expected to increase DEEP's free cash flow by $100 million per year for eight years (starting at the end of this year). If investors had not been expecting this new discovery, what will be the most likely effect on DEEP's stock price upon the announcement of the discovery, given that the firm has 60 million shares outstanding, no debt, and an equity cost of capital of 10%? A. no effect B. rise by $7.11 C. rise by $10.67 D. rise by $8.89

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