Question

Consider Pacific Energy Company and Atlantic Energy, Inc., both of which reported earnings of $963,000. Without new projects, both firms will continue to generate earnings of $963,000 in perpetuity. Assume that all earnings are paid as dividends and that both firms require a return of 13 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.)

b.	Pacific Energy Company has a new project that will generate additional earnings of $113,000 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.)

c.	Atlantic Energy has a new project that will increase earnings by $213,000 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.)

  

Answer 1

Calculate the PE ratio as follows:

Formulas: