Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.97 million barrels per year in 2018, but production is declining at 9% per year for the foreseeable future. Costs of production, transportation, and administration add up to $26.70 per barrel. The average oil price was $66.70 per barrel in 2018. PP has 8.7 million shares outstanding. The cost of capital is 11%. 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 $26.70. Also, ignore taxes. a. Assume that oil prices are expected to fall to $61.70 per barrel in 2019, $56.70 per barrel in 2020, and $51.70 per barrel in 2021. After 2021, assume a long-term trend of oil-price increases at 7% 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
Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.97 million barrels per year in 2018, but production is declining at 9% per year for the foreseeable future. Costs of production, transportation, and administration add up to $26.70 per barrel. The average oil price was $66.70 per barrel in 2018. PP has 8.7 million shares outstanding. The cost of capital is 11%. 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 $26.70. Also, ignore taxes. a. Assume that oil prices are expected to fall to $61.70 per barrel in 2019, $56.70 per barrel in 2020, and $51.70 per barrel in 2021. After 2021, assume a long-term trend of oil-price increases at 7% 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
Chapter11: The Cost Of Capital
Section: Chapter Questions
Problem 20PROB
Related questions
Question
![Problem 4-28 Valuing a business
Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.97 million barrels per year in 2018, but production is
declining at 9% per year for the foreseeable future. Costs of production, transportation, and administration add up to $26.70 per barrel.
The average oil price was $66.70 per barrel in 2018.
PP has 8.7 million shares outstanding. The cost of capital is 11%. 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 $26.70. Also, ignore taxes.
a. Assume that oil prices are expected to fall to $61.70 per barrel in 2019, $56.70 per barrel in 2020, and $51.70 per barrel in 2021.
After 2021, assume a long-term trend of oil-price increases at 7% 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.)
EPS/P ratio
b-2. Is it equal to the 11% cost of capital?
O Yes](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F736f141b-b380-4a82-89d0-ca988bb975f9%2F92b2bda1-7104-4950-8efd-32c4b59d6275%2F007cbi_processed.png&w=3840&q=75)
Transcribed Image Text:Problem 4-28 Valuing a business
Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.97 million barrels per year in 2018, but production is
declining at 9% per year for the foreseeable future. Costs of production, transportation, and administration add up to $26.70 per barrel.
The average oil price was $66.70 per barrel in 2018.
PP has 8.7 million shares outstanding. The cost of capital is 11%. 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 $26.70. Also, ignore taxes.
a. Assume that oil prices are expected to fall to $61.70 per barrel in 2019, $56.70 per barrel in 2020, and $51.70 per barrel in 2021.
After 2021, assume a long-term trend of oil-price increases at 7% 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.)
EPS/P ratio
b-2. Is it equal to the 11% cost of capital?
O Yes
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
![EBK CFIN](https://www.bartleby.com/isbn_cover_images/9781337671743/9781337671743_smallCoverImage.jpg)
![Cornerstones of Financial Accounting](https://www.bartleby.com/isbn_cover_images/9781337690881/9781337690881_smallCoverImage.gif)
Cornerstones of Financial Accounting
Accounting
ISBN:
9781337690881
Author:
Jay Rich, Jeff Jones
Publisher:
Cengage Learning
![Managerial Accounting: The Cornerstone of Busines…](https://www.bartleby.com/isbn_cover_images/9781337115773/9781337115773_smallCoverImage.gif)
Managerial Accounting: The Cornerstone of Busines…
Accounting
ISBN:
9781337115773
Author:
Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:
Cengage Learning
![EBK CFIN](https://www.bartleby.com/isbn_cover_images/9781337671743/9781337671743_smallCoverImage.jpg)
![Cornerstones of Financial Accounting](https://www.bartleby.com/isbn_cover_images/9781337690881/9781337690881_smallCoverImage.gif)
Cornerstones of Financial Accounting
Accounting
ISBN:
9781337690881
Author:
Jay Rich, Jeff Jones
Publisher:
Cengage Learning
![Managerial Accounting: The Cornerstone of Busines…](https://www.bartleby.com/isbn_cover_images/9781337115773/9781337115773_smallCoverImage.gif)
Managerial Accounting: The Cornerstone of Busines…
Accounting
ISBN:
9781337115773
Author:
Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:
Cengage Learning