Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.81 million barrels per year in 2018, but production is declining at 8% per year for the foreseeable future. Costs of production, transportation, and administration add up to $25.10 per barrel. The average oil price was $65.10 per barrel in 2018. PP has 7.1 million shares outstanding. The cost of capital is 10%. All of PP's net income is distributed as dividends. For simplicity, assume that the company will stay in business forever and that costs per barrel are constant at $25.10. Also, ignore taxes. a. Assume that oil prices are expected to fall to $60.10 per barrel in 2019, $55.10 per barrel in 2020, and $50.10 per barrel in 2021. After 2021, assume a long-term trend of oil-price increases at 6% per year. What is the ending 2018 value of one PP share? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Share value 2016

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.81 million barrels per year in 2018, but production is
declining at 8% per year for the foreseeable future. Costs of production, transportation, and administration add up to $25.10 per barrel.
The average oil price was $65.10 per barrel in 2018.
PP has 7.1 million shares outstanding. The cost of capital is 10%. All of PP's net income is distributed as dividends. For simplicity.
assume that the company will stay in business forever and that costs per barrel are constant at $25.10. Also, ignore taxes.
a. Assume that oil prices are expected to fall to $60.10 per barrel in 2019, $55.10 per barrel in 2020, and $50.10 per barrel in 2021.
After 2021, assume a long-term trend of oil-price increases at 6% per year. What is the ending 2018 value of one PP share? (Do not
round intermediate calculations. Round your answer to 2 decimal places.)
Share value 2016
b-1. What is PP's EPS/P ratio? (Do not round intermediate calculations. Round your answer to 4 decimal places.)
EPS/P ratio
b-2. Is it equal to the 10% cost of capital?
Transcribed Image Text:Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.81 million barrels per year in 2018, but production is declining at 8% per year for the foreseeable future. Costs of production, transportation, and administration add up to $25.10 per barrel. The average oil price was $65.10 per barrel in 2018. PP has 7.1 million shares outstanding. The cost of capital is 10%. All of PP's net income is distributed as dividends. For simplicity. assume that the company will stay in business forever and that costs per barrel are constant at $25.10. Also, ignore taxes. a. Assume that oil prices are expected to fall to $60.10 per barrel in 2019, $55.10 per barrel in 2020, and $50.10 per barrel in 2021. After 2021, assume a long-term trend of oil-price increases at 6% per year. What is the ending 2018 value of one PP share? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Share value 2016 b-1. What is PP's EPS/P ratio? (Do not round intermediate calculations. Round your answer to 4 decimal places.) EPS/P ratio b-2. Is it equal to the 10% cost of capital?
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