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Price Earnings Ratio in the United States

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I need some help with the following case:

Consider Pacific Energy Company and U.S. Bluechips, Inc both of which reported earnings of \$750,000. Without new projects, both firms will continue to generate earnings of \$750,000 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 for each company.
b. Pacific Energy Company has a new project that will generate additional earnings of \$100,000 each year in perpetuity. Calculate the new PE ratio of the company.
c. U.S. Bluechips has a new project that will increase earnings by 200,000 in perpetuity. Calculate the new PE ratio of the firm.

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Please see attached. Thank you for asking Brainmass.

\a).
Current PE Ratio
Price/earnings (P/E) ratio can be calculated by using following formula.
P/E ratio = Market price of stock ÷ earnings per share
Earnings = \$750,000 (both firm will continue to generate same earnings in perpetuity)
Rate of return = 14%
Assumption:
• It is assumed that total earnings of \$750,000 are paid as dividends by Pacific Energy Company and U.S. Bluechips, Inc so, EPS and DPS are similar for both firms.
• It is also assumed that both firms have 500000 shares of common ...

Solution Summary

The price earnings ratios in the United States are examined. The Pacific Energy Company generating additional earnings are determined.

\$2.19