Consider Pacific Energy Company and U.S. Bluechips, Inc., both of which reported

Question

Consider Pacific Energy Company and U.S. Bluechips, Inc., both of which reported earnings of $763,000. Without new projects, both firms will continue to generate earnings of $763,000 in perpetuity. Assume that all earnings are paid as dividends and that both firms require a 13 percent rate of return.

What is the current PE ratio for each company? (Round your answers to 2 decimal places. (e.g., 32.16))

Pacific Energy Company has a new project that will generate additional earnings of $107,000 each year in perpetuity. Calculate the new PE ratio of the company. (Round your answer to 2 decimal places. (e.g., 32.16))

U.S. Bluechips has a new project that will increase earnings by $207,000 in perpetuity. Calculate the new PE ratio of the firm. (Round your answer to 2 decimal places. (e.g., 32.16))

Consider Pacific Energy Company and U.S. Bluechips, Inc., both of which reported earnings of $763,000. Without new projects, both firms will continue to generate earnings of $763,000 in perpetuity. Assume that all earnings are paid as dividends and that both firms require a 13 percent rate of return.

Explanation / Answer

A] Earnings =763000 FOR PERPETUITY

REQUIRED RATE OF RETURN = 13%

MAKET VALUE OF Pacific Energy Company = 763000/0.13

= 5869231

MAKET VALUE OF U.S. Bluechips, Inc= 763000/0.13

= 5869231

CURRENT P.E. RATIO OF Pacific Energy Company = MAKET VALUE OF Pacific Energy Company/EARNIGS

= 5869231/763000

= 7.69

CURRENT P.E. RATIO OF U.S. Bluechips, Inc = MAKET VALUE OF Pacific Energy Company/EARNIGS

= 5869231/763000

= 7.69

B]NEW MAKET VALUE OF Pacific Energy Company = (763000+107000)/0.13

= 6692308

NEW PE RATIO OF Pacific Energy Company = 6692308/763000

= 8.77

C]NEW MAKET VALUE OF U.S. Bluechips, Inc = (763000+207000)/0.13

= 7461538

NEW PE RATIO OF U.S. Bluechips, Inc = 7461538/763000

= 9.78

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