Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 4, Problem 25PS
DCF and
PP has 7 million shares outstanding. The cost of capital is 9%. 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 $25. Also, ignore taxes.
- a. What is the ending 2016 value of one PP share? Assume that oil prices are expected to fall to $60 per barrel in 2017, $55 per barrel in 2018, and $50 per barrel in 2019. After 2019, assume a long-term trend of oil-price increases at 5% per year.
- b. What is PP’s EPS/P ratio and why is it not equal to the 9% cost of capital?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.92 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 $26.20 per barrel. The average oil price was $66.20 per barrel in 2018.PP has 8.2 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 $26.20. Also, ignore taxes.a. Assume that oil prices are expected to fall to $61.20 per barrel in 2019, $56.20 per barrel in 2020, and $51.20 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.)
b-1. What is PP’s EPS/P ratio? (Do not round intermediate calculations.…
Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.96 million barrels per year in 2018, but production is declining at 8% per year for the foreseeable future. Costs of production, transportation, and administration add up to $26.60 per barrel. The average oil price was $66.60 per barrel in 2018.PP has 8.6 million shares outstanding. The cost of capital is 10%. 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 $26.60. Also, ignore taxes.a. Assume that oil prices are expected to fall to $61.60 per barrel in 2019, $56.60 per barrel in 2020, and $51.60 per barrel in 2021. After 2021, assume a long-term trend of oil-price increases at 6% per year. What is the ending 2018 value of one PP share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b-1. What is PP’s EPS/P ratio? (Do not round intermediate calculations.…
**Please solve using Excel and show formulas.**
Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.97 million barrels per year in 2018, and it will be stable for the foreseeable future. Costs of production, transportation, and administration add up to $26.70 per barrel. The average oil price was $66.7 per barrel in 2018, and it will not change in the future.
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.
Given more time you would compute the net income for 2019, which is 62,744,500. Assume that this net income will remain constant for the foreseeable future (there will be no growth in the net Income).
Question: What is the ending 2018 value of one PP share?
Multiple Choice
$71.9
$64.1
$68.6
$70.9
$65.6
Chapter 4 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 4 - True/false True or false? a. All stocks in an...Ch. 4 - Dividend discount model Respond briefly to the...Ch. 4 - Dividend discount model Company X is expected to...Ch. 4 - Dividend discount model Company Y does not plow...Ch. 4 - Constant-growth DCF model Company Zs earnings and...Ch. 4 - Dividend discount model Company Z-prime is like Z...Ch. 4 - Dividend discount model If company Z (see Problem...Ch. 4 - Prob. 8PSCh. 4 - Prob. 9PSCh. 4 - Free cash flow Under what conditions does r, a...
Ch. 4 - Prob. 11PSCh. 4 - Prob. 12PSCh. 4 - Horizon value Suppose the horizon date is set at a...Ch. 4 - Stock quotes Go to finance.yahoo.com and get...Ch. 4 - Two-stage DCF model Consider the following three...Ch. 4 - Constant-growth DCF model Pharmecology just paid...Ch. 4 - Two-stage DCF model Company Qs current return on...Ch. 4 - Cost of equity capital Each of the following...Ch. 4 - Growth opportunities Alpha Corps earnings and...Ch. 4 - Prob. 23PSCh. 4 - Two-stage DCF model Compost Science Inc. (CSI) is...Ch. 4 - DCF and free cash flow Permian Partners (PP)...Ch. 4 - DCF and free cash flow Construct a new version of...Ch. 4 - Valuing a business Mexican Motors market cap is...Ch. 4 - Valuing Tree cash flow Phoenix Corp. faltered in...Ch. 4 - Constant-growth DCF formula The constant-growth...Ch. 4 - DCF valuation Portfolio managers are frequently...Ch. 4 - Valuing a business Construct a new version of...
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.Similar questions
- Strickler Technology is considering changes in its working capital policies to improve its cash flow cycle. Stricklers sales last year were 3,250,000 (all on credit), and its net profit margin was 7%. Its inventory turnover was 6.0 times during the year, and its DSO was 41 days. Its annual cost of goods sold was 1,800,000. The firm had fixed assets totaling 535,000. Stricklers payables deferral period is 45 days. a. Calculate Stricklers cash conversion cycle. b. Assuming Strickler holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. c. Suppose Stricklers managers believe the annual inventory turnover can be raised to 9 times without affecting sale or profit margins. What would Stricklers cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9 for the year?arrow_forwardPermian Partners (PP) produces from aging oil fields in west Texas. Production is currently 1.94 million barrels per year, but is declining at 5% per year for the foreseeable future. Costs of production, transportation, and administration add up to $26.40 per barrel. The current oil price is $66.40 per barrel. PP has 8.4 million shares outstanding. The cost of equity is 7%. 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 $26.40. Also, ignore taxes. a.Assume that oil prices are expected to fall to $61.40 per barrel next year, and to $56.40 and $51.40 per barrel in the two years following. After that decrease, assume a long-term trend of oil-price increases at 3% per year. What is the value of one PP share? b-1.What is PP’s E/P ratio? b-2.Is it equal to the 7% cost of capital?arrow_forwardLonghorn, Incorporated, has produced rodeo supplies for over 20 years. The company currently has a debt-equity ratio of 55 percent and the tax rate is 23 percent. The required return on the firm’s levered equity is 14 percent. The company is planning to expand its production capacity. The equipment to be purchased is expected to generate the following unlevered cash flows: Year Cash Flow 0 −$ 18,400,000 1 5,740,000 2 9,540,000 3 8,840,000 The company has arranged a debt issue of $9.42 million to partially finance the expansion. Under the loan, the company would pay interest of 9 percent at the end of each year on the outstanding balance at the beginning of the year. The company also would make year-end principal payments of $3,140,000 per year, completely retiring the issue by the end of the third year. What is the APV of the project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)arrow_forward
- Merton Analytics is considering changes in its working capital policies to improve its cash flow cycle. Merton’s sales last year were $4,250,000 (all on credit), and its net profit margin was 7%. Its inventory turnover was 7.5 times during the year, and its DSO was 41 days. Its annual cost of goods sold was $2,200,000. The firm had fixed assets totaling $585,000. Merton’s payables deferral period is 42 days. Calculate Merton’s cash conversion cycle. Assuming Merton holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. Suppose Merton’s managers believe the annual inventory turnover can be raised to 9.5 times without affecting sales. What would Merton’s cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9.5 for the year?arrow_forwardMooradian Corporation's free cash flow during the just-ended year (t = 0) was $200 million, and its FCF is expected to grow at a constant rate of 7.5% in the future. Assume the firm has zero non-operating assets. If the weighted average cost of capital is 12.5%, what is the firm's total corporate value, in millions? a. $1,600 million b. $4,300 million c. $1,720 million d. $2,867 million e. $4,000 millionarrow_forwardHeavy Metal Corporation is expected to generate the following free cash flows over the next five years: Year 1 2 3 4 5 FCF ($ million) 51.1 69.2 78.8 76.4 80.1 After that, the free cash flows are expected to grow at the industry average of 3.9% per year. Using the discounted free cash flow model and a weighted average cost of capital of 13.5%: Estimate the enterprise value of Heavy Metal. (Round to two decimalplaces.) If Heavy Metal has no excess cash, debt of $285 million, and 43 million shares outstanding, estimate its share price. (Round to two decimalplaces.)arrow_forward
- CELFIN CAPITAL generates pre-tax operating cash flows (asset flows) of MM$ 4,000 per year in perpetuity. The market value of its debt is MM$ 8,000, which is in perpetuity and risk-free, with an associated cost of debt (kb) rate of 4% (and which trades at 115% at par). The required shareholder return is 20%. The number of shares in the company is 200,000,000. Assuming a world with corporate taxes of 25%: (a) Calculate the value of the firm, its share price, its cost of capital without debt, its weighted average cost of capital, and shareholder wealth. (b) Suppose that the company decides to change its target capital structure and for this purpose repurchases debt, issuing new shares for a total of MM$ 2,000. Determine the new price per share, final number of shares, firm value, equity cost, weighted average cost of capital of the firm and shareholder wealth after the capital structure change. Finally, explain the amount of the change in wealth.arrow_forwardHeavy Metal Corporation is expected to generate the following free cash flows over the next five years: After that, the free cash flows are expected to grow at the industry average of 4.3% per year. Using the discounted free cash flow model and a weighted average cost of capital of 14.3%: a. Estimate the enterprise value of Heavy Metal. b. If Heavy Metal has no excess cash, debt of $291 million, and 35 million shares outstanding, estimate its share price.arrow_forwardDyrdek Enterprises has equity with a market value of $12.2 million and the market value of debt is $4.25 million. The company is evaluating a new project that has more risk than the firm. As a result, the company will apply a risk adjustment factor of 1.6 percent. The new project will cost $2.48 million today and provide annual cash flows of $646,000 for the next 6 years. The company's cost of equity is 11.63 percent and the pretax cost of debt is 5.02 percent. The tax rate is 25 percent. What is the project's NPV? a. $212,299 b. $506,561 c. $204,036 d. $366,955 e. $237,409arrow_forward
- The management of Peerless Fabrics Inc. is considering a change in its capital structure.Currently, Peerless has 100,000 shares outstanding at a market price of $40 each. It is also carrying loansworth $1,500,000 on its balance sheet with an interest rate of 6% p.a, thus implying a corporate D/E ratio of0.375:1The EBIT is $575,000 and is expected to remain constant every year for an indefinite time. Since Peerlessproduces indigenous fabric, it enjoys a tax holiday which is available to all businesses that promote importsubstitution. As such, Peerless lives in a tax-free world for now and passes on the benefit to its shareholdersin the form of 100% dividend payout.The proposal for a change in capital structure is about reducing the reliance on debt during uncertain timesthat the ongoing pandemic has created. After lengthy negotiations with the lenders, the lenders have agreedfor Peerless to pre-pay 25% of its outstanding loan without penalty. The management is keen to follow throughwith…arrow_forwardThe management of Peerless Fabrics Inc. is considering a change in its capital structure.Currently, Peerless has 100,000 shares outstanding at a market price of $40 each. It is also carrying loansworth $1,500,000 on its balance sheet with an interest rate of 6% p.a, thus implying a corporate D/E ratio of0.375:1The EBIT is $575,000 and is expected to remain constant every year for an indefinite time. Since Peerlessproduces indigenous fabric, it enjoys a tax holiday which is available to all businesses that promote importsubstitution. As such, Peerless lives in a tax-free world for now and passes on the benefit to its shareholdersin the form of 100% dividend payout.The proposal for a change in capital structure is about reducing the reliance on debt during uncertain timesthat the ongoing pandemic has created. After lengthy negotiations with the lenders, the lenders have agreedfor Peerless to pre-pay 25% of its outstanding loan without penalty. The management is keen to follow throughwith…arrow_forwardThe management of Peerless Fabrics Inc. is considering a change in its capital structure.Currently, Peerless has 100,000 shares outstanding at a market price of $40 each. It is also carrying loansworth $1,500,000 on its balance sheet with an interest rate of 6% p.a, thus implying a corporate D/E ratio of0.375:1The EBIT is $575,000 and is expected to remain constant every year for an indefinite time. Since Peerlessproduces indigenous fabric, it enjoys a tax holiday which is available to all businesses that promote importsubstitution. As such, Peerless lives in a tax-free world for now and passes on the benefit to its shareholdersin the form of 100% dividend payout.The proposal for a change in capital structure is about reducing the reliance on debt during uncertain timesthat the ongoing pandemic has created. After lengthy negotiations with the lenders, the lenders have agreedfor Peerless to pre-pay 25% of its outstanding loan without penalty. The management is keen to follow throughwith…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Cornerstones of Financial Accounting
Accounting
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Portfolio return, variance, standard deviation; Author: MyFinanceTeacher;https://www.youtube.com/watch?v=RWT0kx36vZE;License: Standard YouTube License, CC-BY