Gulf Oil Corporation-Takeover Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Gulf Oil Corporation-Takeover Case Solution

If the Gulf Company does not opts for the E&D Program the value per share drops to 66 which was 173 if they had gone for E&D Program. As there debt and equity value is same as 10836. And for value per share which we found out as Equity Value/ No of outstanding shares = 10836/165.3= 66, and they offering at 70, which means the financers would be getting a negative rate of return on the investment. So this option is not feasible for the company.

Optimal Bid Price Levels:
Minimum Bid Price Level	75
Enterprise Value (Equity Value)	35985
No. of Outstanding Shares	165.3
Maximum Bid Price Level	218

The real value per share for the Gulf oil’s stock should be at a minimum of $75 per share, as its closest rival (ARCO) would be offering a maximum price of $75 in the bidding process and to win the bidding process, the Socal Company should set the minimum price as $75. However, the maximum should be set at the net present value through the acquisition, i.e. actually the difference between the acquisition price and the company’s equity value, which is calculated as $218 per share. The company should keep the price per share between $75 and $218 per share.

5. This question is designed to demonstrate the effect of the NPV of Gulf’s most recent exploration efforts.

	In Millions
Total Reserves in 1983	3038
Unrecoverable Reserves	725
Recoverable Reserves	2313

In this we calculated the recoverable reserves which is equal to total reserves in 1983 – Unrecoverable Reserves = 3038 – 725= 2313.

Depletion	Units of production Method
1976	365
1977	338
1978	334
1979	367
1980	342
1981	323
1982	296
1983	290
Total	2655
Depletion In 7 Years	2365

The unit of production method is a technique of knowing the depletion of the value of a resource like the oil land over time. It becomes useful when a resource’s value is more closely related to the number of component it makesas compared to the number of years it is in use, and in this case in round about 7 y; it will get depleted.

Average expensed cost per barrel

In 1981 the cost of barrel was 688 and its units were 2951 = 688/2951=0.233

		Exploration Cost	Capitalization Costs	Barrels
		In Millions	In Millions	Units
	1981	688	2008	2951
	1982	727	1919	2969
	Total	3927	5920	5920

i	Average Expensed Cost
	Per Barrel in 1981	0.233
	Per Barrel in 1982	0.245
	Total cost per barrel	0.478

ii	Average capitalized cost
	Per Barrel in 1981	0.680
	Per Barrel in 1982	0.646
	Total cost per barrel	1.327

In 1982 the cost of barrel was 727 and its units were 2969 = 727/2969=0.245

And by add adding these both we will get total cost per barrel 0.478

Average capitalized cost

In 1981 the cost of barrel was 2008 and its units were 2951 = 688/2951=0.680

In 1982 the cost of barrel was 1919 and its units were 2969 = 688/2951=0.646

And by add adding these both we will get total cost per barrel 1.327.

D,E,F

Present Value
PV of Tax Shelters Exp'd	673.81
PV of Tax Shelters Cap'd	1870
Sum of PV of exploration benefits	2543.81

The PV of Tax Shelter expensed is 673.81

The PV of Tax Shelter capitalizedis 1870

And the sum of the PV of Exploration benefits will be exploration will be 2543.81

G, H

Selling price per barrel	$22.42
Production & Wellhead Costs per barrel	$5.87
Other expenses per barrel	$1.21
Pre-tax profit per barrel	$15.34

Pre-tax profit per barrel	15.34
Tax Rate	50%
After tax profit per barrel	7.67

As, the price for selling oil is $22.42 per barrel and the costs for the production and wellhead and other expenses amount to $5.87 and $1.21 per barrel. The operating costs are subtracted from the price per barrel, which resulted in a pre-tax profit of $15.34 per barrel. Afterwards, the taxes are subtracted at a rate of 50%, which resulted in an after tax profit of $7.67 per barrel.

I, J

Time - Years	8
Sum of PV of exploration benefits	2543.809524
Total cost per barrel	497.5473288
Pre-tax profit per barrel	15.34

NPV of 1 year of Exploration and Development	2061.602195
Terminal Value	178.9666667
Total NPV per Barrel	2240.568862

Gulf valuation	24895.20957
No of shares outstanding	165.3
Per share value	150.606

In order to find the NPV per barrel of the exploration project adopted by Gulf Company, the duration of the project is considered to be 8 years. The pre-tax profit per barrel is added to the sum of the exploration benefits, from which the exploration costs are subtracted, resulting in a net present value of 2061.60 million. However, after adding the terminal value of 178.97 million, the total NPV is calculated as 2240.56 million..........................

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Gulf Oil Corporation-Takeover Harvard Case Solution & Analysis