Permian Partners (PP) produces from aging oil flelds in west Texas. Production is 1.86 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 $25.60 per barrel. The average oil price was $65.60 per barrel in 2018. PP has 76 milion 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 $25.60. Also, ignore taxes. a. Assume that oil prices are expected to fall to $60.60 per barrel in 2019, $55.60 per barrel in 2020, and $50.60 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.) EPSP ratio b-2. Is it equal to the 10% cost of capital? O Yes
Permian Partners (PP) produces from aging oil flelds in west Texas. Production is 1.86 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 $25.60 per barrel. The average oil price was $65.60 per barrel in 2018. PP has 76 milion 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 $25.60. Also, ignore taxes. a. Assume that oil prices are expected to fall to $60.60 per barrel in 2019, $55.60 per barrel in 2020, and $50.60 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.) EPSP ratio b-2. Is it equal to the 10% cost of capital? O Yes
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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