Chapter 9, Problem 25QAP

Price-Earnings Ratio Consider Pacific Energy Company and Atlantic Energy, Inc., both of which reported earnings of $\$720,000$. Without new projects, both firms will continue to generate earnings of $\$720,000$ in perpetuity. Assume that all earnings are paid as dividends and that both firms require a return of 11 percent.

a. What is the current PE ratio for each company?

b. Pacific Energy Company has a new project that will generate additional earnings of $\$150,000$ each year in perpetuity. Calculate the new PE ratio of the company.

c. Atlantic Energy has a new project that will increase earnings by $\$300,000$ in perpetuity. Calculate the new PE ratio of the firm.