Corporate Finance
Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 9, Problem 25QAP

Price-Earnings Ratio Consider Pacific Energy Company and Atlantic Energy, Inc., both of which reported earnings of $ 720 , 000 . Without new projects, both firms will continue to generate earnings of $ 720 , 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 $ 150 , 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 $ 300 , 000 in perpetuity. Calculate the new PE ratio of the firm.

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