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# Price Earnings Ratio in the United States

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.

#### Solution Preview

\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