Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.95 million barrels per year in 2018, but production is declining at 7% per year for the foreseeable future. Costs of production, transportation, and administration add up to $26.50 per barrel. The average oil price was $66.50 per barrel in 2018. PP has 8.5 million shares outstanding. The cost of capital is 9%. 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 $26.50. Also, ignore taxes. a. Assume that oil prices are expected to fall to $61.50 per barrel in 2019, $56.50 per barrel in 2020, and $51.50 per barrel in 2021. After 2021, assume a long-term trend of oil-price increases at 5% per year. What is the ending 2018 value of one PP share? (Do not round intermediate calculations. Round your answer to 2 decimal places.) 2018 Share value a EPS/P ratio b-1. What is PP's EPS/P ratio? (Do not round intermediate calculations. Round your answer to 4 decimal places.) $ Yes 56.61+/-1 ● No b-2. Is it equal to the 9% cost of capital? $ 0.1621+0.5
Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.95 million barrels per year in 2018, but production is declining at 7% per year for the foreseeable future. Costs of production, transportation, and administration add up to $26.50 per barrel. The average oil price was $66.50 per barrel in 2018. PP has 8.5 million shares outstanding. The cost of capital is 9%. 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 $26.50. Also, ignore taxes. a. Assume that oil prices are expected to fall to $61.50 per barrel in 2019, $56.50 per barrel in 2020, and $51.50 per barrel in 2021. After 2021, assume a long-term trend of oil-price increases at 5% per year. What is the ending 2018 value of one PP share? (Do not round intermediate calculations. Round your answer to 2 decimal places.) 2018 Share value a EPS/P ratio b-1. What is PP's EPS/P ratio? (Do not round intermediate calculations. Round your answer to 4 decimal places.) $ Yes 56.61+/-1 ● No b-2. Is it equal to the 9% cost of capital? $ 0.1621+0.5
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
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Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
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**Please solve using Excel and show the formulas.**
The correct answers are shown but I have no idea how to do the math to get the answers in Excel if someone could please walk me through the problem step by step and show the formulas.
Transcribed Image Text:**Permian Partners (PP) Oil Production Analysis**
**Overview**
Permian Partners (PP) extracts oil from aging fields in West Texas. The company produced 1.95 million barrels in 2018, but this production is expected to decline by 7% annually. Costs associated with production, transportation, and administration are $26.50 per barrel. The oil price averaged $66.50 per barrel in 2018.
Key Details:
- Total shares outstanding: 8.5 million
- All net income is distributed as dividends
- Cost of capital: 9%
- Assumptions: Company remains operational indefinitely and costs per barrel remain constant at $26.50
- Taxes are ignored in calculations
### Financial Calculations for 2018
#### a. Future Oil Price Projections and Share Value Calculation
Assume oil prices are expected to drop to:
- $61.50 per barrel in 2019
- $56.50 per barrel in 2020
- $51.50 per barrel in 2021
Post-2021, assume a 5% annual increase in oil prices.
**Question:** What is the ending 2018 value of one PP share?
(Please do not round intermediate calculations and round your final answer to two decimal places).
**Answer:**
Share Value in 2018: **$56.61**
*(This value is calculated based on the given assumptions and projected oil prices.)*
#### b. EPS/P Ratio and Cost of Capital
**b-1.** Calculation of PP's EPS/P Ratio
**Question:** What is PP’s EPS/P ratio?
(Do not round intermediate calculations. Round your answer to four decimal places).
**Answer:**
EPS/P Ratio: **0.1621**
**b-2.** Comparing EPS/P Ratio to Cost of Capital
**Question:** Is the EPS/P ratio equal to the 9% cost of capital?
**Options:**
- Yes
- No
**Answer:**
(No direct answer provided; students need to compare the calculated EPS/P ratio to the given cost of capital of 9%).
### Conclusion
This analysis provides a projected financial overview of Permian Partners (PP) based on declining oil production, set costs, and varying future oil prices. It illustrates essential financial metrics such as share value and EPS/P ratio for informed investment and business decisions.
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