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home / study / business / finance / questions and answers / consider pacific energy company and u.s. bluechips, ... Question Consider Pacific Energy Company and U.S. Bluechips, Inc., both of which reported earnings of $962,000. Without new projects, both firms will continue to generate earnings of $962,000 in perpetuity. Assume that all earnings are paid as dividends and that both firms require a return of 12 percent. a. What is the current PE ratio for each company? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) PE ratio ______ times b. Pacific Energy Company has a new project that will generate additional earnings of $112,000 each year in 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 $212,000 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 _______ times
Explanation / Answer
Answer
Answer (a)
Figures in $
Particulars
Pacific Energy Company
U.S. Bluechips, Inc.
reported earnings
a
9,62,000
9,62,000
require a return
b
12%
12%
Total value of the firm (a/b)
c
8016666.67
8016666.67
reported earnings
d
9,62,000
9,62,000
P/E ratio (c/d)
8.33
8.33
Answer(b)
Figures in $
Particulars
Pacific Energy Company
Total value of the firm*
a
8016666.67
(as per above table)
reported earnings
b
10,74,000
(962000+112000)
P/E ratio (a/b)
7.46
*It is assumed that Value of firm remains unchanged
Answer (c )
Figures in $
Particulars
U.S. Bluechips, Inc.
Total value of the firm*
a
8016666.67
(as per above table)
reported earnings
b
11,74,000
(962000+212000)
P/E ratio (a/b)
6.83
*It is assumed that value of the firm remains unchanged.
Figures in $
Particulars
Pacific Energy Company
U.S. Bluechips, Inc.
reported earnings
a
9,62,000
9,62,000
require a return
b
12%
12%
Total value of the firm (a/b)
c
8016666.67
8016666.67
reported earnings
d
9,62,000
9,62,000
P/E ratio (c/d)
8.33
8.33
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