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 $969,000 Without new projects, both firms will continue to generate earnings of $969,000 in perpetuity. Assume that all earnings are paid as dividends and that both firms require a retun of 12 percent What is the your answer to 2 decimal places, e.g, 32.16.) a. current PE ratio for each company? (Do not round intermediate calculations and round PE ratio times b. Pacific Energy Company has a new project that will generate additional earnings of $119,000 each year n perpetuity. Calculate the new PE ratio of the company. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g, 32.16.) PE ratio times c. U.S. Bluechips has a new project that will increase earnings by $219,000 in perpetuity Calculate the new PE ratio of the firm. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) PE ratio oa

Explanation / Answer

a. total price of shares of both company(based on gordon growth model) = 969000/0.12 = 8075000

total earning of each company = 969000

PE ratio = 8075000/969000 = 8.33

b. new total earning of pacific = 969000 + 119000 = 1088000

new total price of pacific = 1088000/0.12 = 9066666.67

PE ratio = 9066666.67/1088000 = 8.33

c. new total earning of US bluechips = 969000 + 219000 = 1188000

new total price of US bluechips = 1188000/0.12 = 9900000

PE ratio = 9900000/1188000 = 8.33

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