Financial Accounting Consider Pacific Energy Company and U.S. Bluechips, Inc., both of whichreported earnings of $957,000. Without new projects, both firms willcontinue to generate earnings of $957,000 in perpetuity. Assume that allearnings are paid as dividends and that both firms require a return of 14percent.a. What is the current PE ratio for each company?b. Pacific Energy Company has a new project that will generate additionalearnings of $107,000 each year in perpetuity. Calculate the new PE ratioof the company.c. U.S. Bluechips has a new project that will increase earnings by $207,000in perpetuity. Calculate the new PE ratio of the firm.

Given:Both companies, Pacific Energy and U.S. Bluechips, report earnings of $957,000 in…

Answered: Consider Pacific Energy Company and…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Consider Pacific Energy Company and Atlantic Energy, Incorporated, both of which reported earnings of $790,000. Without new projects, both firms will continue to generate earnings of $790,000 in perpetuity. Assume that all earnings are paid as dividends and that both firms require a return of 11 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 $175,000 each year in perpetuity. Calculate the new PE ratio of the company. c. Atlantic Energy has a new project that will increase earnings by $350,000 in perpetuity. Calculate the new PE ratio of the firm.
AAA Inc. is evaluating a project that will require $500,000 in assets. The project is financed with equity only and is expected to generate earnings before interest and taxes of $90,000. The firm has a tax rate of 16%. What is the ROE (return on equit for this project? a. 16.00% b. 18.15% O c. 10.75% O d. 15.12%
4) If the firm follows a residual dividend policy, determine its payout ratio. Task 2: ELTER Industries is considering the expansion project that involves the purchase of new equipment. The cost of equipment is €460,000, including installation and transportation costs. The equipment will be depreciated to zero over a 4-year period using straight-line depreciation approach. The project will generate additional annual revenues of €250,000, and it will result in additional annual cash operating expenses of €93,000. The company expects to sell the equipment after 4 years for €80,000. Additionally, during the life of the investment, an inventory investment of €90,000 is needed. The inventory investment will be made at the time of the purchase of the equipment. ELTER Industries has the 40% corporate tax rate. The required rate of return for the project = 10%. 1) Determine the project's initial cash outlay;
Wildhorse Co. is considering an investment that will return a lump sum of $928,900, 8 years from now. For calculation purposes, use 5 decimal places as displayed in the factor table What amount should Wildhorse Co. pay for this investment to earn an 12% return. ( round answer to 2 decimal places, e.g. 25.25) Lincoln Company Should pay?
Howell Petroleum, Inc., is trying to evaluate a generation project with the following cash flows: Year O 1 2 Cash Flow -$38,000,000 57,500,000 -13,000,000 a. If the company requires a return of 11 percent on its investments, what is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Compute the IRRs for this project. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. Enter the larger IRR in the first answer box and the smaller IRR in the second answer box. If you can only calculate one IRR, enter it in both boxes to receive partial credit. A negative answer should have a minus sign.) a. NPV b. Larger IRR Smaller IRR 3,250,950.00 23.65 % %
Suppose that Duc - ee's Ltd. has no cash in hand. The firm instead can issue a financial claim priced $10 million today that promises to pay investors $11 million in one year. How much is the project worth, net of the cost, in terms of the present value today (in $ million, rounded to 3 decimal places)?
Domestic
You need to estimate the value of Laputa Aviation. You have the following forecasts (in millions of dollars) of its profits and of its future investments in new plant and working capital: Earnings before interest, taxes, depreciation, and amortization (EBITDA) Depreciation Pretax profit Tax at 30% Investment X Answer is complete but not entirely correct. a. Total value b. Laputa's equity 1 $ 82 12 70 21 11 $ $ Year 752 376 x 2 $ 102 22 80 24 14 From year 5 onward, EBITDA, depreciation, and investment are expected to remain unchanged at year-4 levels. Laputa is financed 50% by equity and 50% by debt. Its cost of equity is 13%, its debt yields 9%, and it pays corporate tax at 30%. 3 $ 117 27 90 27 17 a. Estimate the company's total value. Note: Do not round intermediate calculations. Enter your answer in millions rounded to the nearest whole amount. b. What is the value of Laputa's equity? Note: Do not round intermediate calculations. Enter your answer in millions rounded to the nearest…
Witham, Inc. estimates that its retained earnings break point (BPRE) is $32 million, and its WACC is 11.2 percent if common equity comes from retained earnings. However, if the company issues new stock to raise new common equity, it estimates that its WACC will rise to 12.4 percent. The company is considering the following investment projects: Project A BUDE C Size $10 million A. $38 million B. $28 million C. $18 million D. $32 million E. None of the above 8 million 10 million 10 million 7 million What is the firm's optimal capital budget? IRR 14.0% 16.5 12.2 15.4 11.8
Pharoah Company is considering an investment that will return a lump sum of $931,000 4 years from now. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) What amount should Pharoah Company pay for this investment to earn an 8% return? (Round answer to 2 decimal places, eg. 25.25.) Lincoln Company should pay $ 684,974.46
(a) Consider a project that costs $100 million today and generates a cash flow of $106 million in one year. What is the IRR of this project? Give your answer to 2 decimal places (b) Suppose the market interest rate is 7%. Use the IRR calculated in Q2(a) above to determine whether this project is profitable. Explain why or why not Do not use excel
Vijay

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