Chapter 6 Consider Pacific Energy Company and U.S. Bluechips, Inc., both of which reported earnings of $951,000

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Chapter 6 Q29
Consider Pacific Energy Company and U.S. Bluechips, Inc., both of which reported earnings of $951,000.
Without new projects, both firms will continue to generate earnings of $951,000 in perpetuity.
 Assume that all earnings are paid as dividends and that both firms require a return of 14 percent.

Facts From Question
Earnings 951000
Perpetual Earnings 951000
Return  ® 0.14

A) What is the current PE ratio for each company?

Price = Earnings / R
Price  6792857.143
PE =  Price / Earnings 7.142857143


B)  Pacific Energy Company has a new project that will generate additional earnings of $101,000 each year in perpetuity.
 Calculate the new PE ratio of the company.

Price = Earnings / R
New Earnings 101000
Previous Earnings 951000
Price  7514285.714
PE 7.901457113


C) c. U.S. Bluechips has a new project that will increase earnings by $201,000 each year in perpetuity.
Calculate the new PE ratio of the company.

Price = Earnings / R
New Earnings 201000
Previous Earnings 951000
Price  8228571.429
PE 8.652546192