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 $750,000. Without new projects, both firms will continue to generate earnings of $750,000 in perpetuity. Assume that all earnings are paid as dividends and that both firms require a 14 percent rate of return. Required: (a) What is the current PE ratio for each company? Pacific Energy Company: U.S. Bluechips, Inc.,: (b) Pacific Energy Company has a new project that will generate additional earnings of $100,000 each year in perpetuity. Calculate the new PE ratio of the company. PE ratio times (c) U.S. Bluechips has a new project that will increase earnings by $200,000 in perpetuity. Calculate the new PE ratio of the firm. PE ratio times

Explanation / Answer

So return is $750,000 a year forever at 14% discount rate The P/E ratio should be 1/14% = 7.142857143 The P/E ratio are the same for each since everything about them is equal aside from the name, is there more to the question?

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