Consider Pacific Energy Company and Atlantic Energy, Incorporated, both of which reported earnings of $970,000. Without new projects, both firms will continue to generate earnings of $970,000 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? b. Pacific Energy Company has a new project that will generate additional earnings of $120,000 each year in perpetuity. Calculate the new PE ratio of the company. c. Atlantic Energy has a new project that will increase earnings by $220,000 in perpetuity. Calculate the new PE ratio of the firm.
Consider Pacific Energy Company and Atlantic Energy, Incorporated, both of which reported earnings of $970,000. Without new projects, both firms will continue to generate earnings of $970,000 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? b. Pacific Energy Company has a new project that will generate additional earnings of $120,000 each year in perpetuity. Calculate the new PE ratio of the company. c. Atlantic Energy has a new project that will increase earnings by $220,000 in perpetuity. Calculate the new PE ratio of the firm.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
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Consider Pacific Energy Company and Atlantic Energy, Incorporated, both of which reported earnings of $970,000. Without new projects, both firms will continue to generate earnings of $970,000 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? |
| b. |
Pacific Energy Company has a new project that will generate additional earnings of $120,000 each year in perpetuity. Calculate the new PE ratio of the company. |
| c. |
Atlantic Energy has a new project that will increase earnings by $220,000 in perpetuity. Calculate the new PE ratio of the firm. |
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