Consider Pacific Energy Company and U. S. Bluechips, Inc. both of which reported earnings of $750000. Without new projects, both firms will continue to generate earnings of $750000 in perpetuity. Assume that all earnings are paid as dividends and that both firms require a 14 percent rate of return.
a. What is the current PE ratio for each company?
b. Pacific Energy Company has a new project that will generate additional earnings of $100000 each year in perpetuity. find out the new PE ratio of the company.
c. U. S. Bluechips has a new project that will increase earnings by $200000 in perpetuity. find out the new PE ratio of the firm