Permian Partners (PP) produces from aging oil flelds in west Texas. Production is 1.86 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 $25.60 per barrel. The average oil price was $65.60 per barrel in 2018. PP has 76 milion 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 $25.60. Also, ignore taxes. a. Assume that oil prices are expected to fall to $60.60 per barrel in 2019, $55.60 per barrel in 2020, and $50.60 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.) Share value 2016 b-1. What is PP's EPS/P ratio? (Do not round intermediate calculations. Round your answer to 4 decimal places.) EPSP ratio b-2. Is it equal to the 10% cost of capital? O Yes
Permian Partners (PP) produces from aging oil flelds in west Texas. Production is 1.86 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 $25.60 per barrel. The average oil price was $65.60 per barrel in 2018. PP has 76 milion 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 $25.60. Also, ignore taxes. a. Assume that oil prices are expected to fall to $60.60 per barrel in 2019, $55.60 per barrel in 2020, and $50.60 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.) Share value 2016 b-1. What is PP's EPS/P ratio? (Do not round intermediate calculations. Round your answer to 4 decimal places.) EPSP ratio b-2. Is it equal to the 10% cost of capital? O Yes
Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter5: Investment Decisions: Look Ahead And Reason Back
Section: Chapter Questions
Problem 5.4IP
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![Permian Partners (PP) produces from aging oll fields in west Texas. Production is 1.86 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 $25.60 per
barrel. The average ol price was $65.60 per barrel in 2018.
PP has 76 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 $25.60. Also, ignore taxes.
a. Assume that oll prices are expected to fall to $60.60 per barrel in 2019, $55.60 per barrel in 2020, and $50.60 per barrel in 2021.
After 2021, assume a long-term trend of oll-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.)
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 10% cost of capital?
O Yes](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F0625c90e-fb54-44d6-bdf6-6dfbd3b852c3%2Fb94e8802-76a3-408b-b1b8-820251f75e0c%2Fpdvf8t_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Permian Partners (PP) produces from aging oll fields in west Texas. Production is 1.86 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 $25.60 per
barrel. The average ol price was $65.60 per barrel in 2018.
PP has 76 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 $25.60. Also, ignore taxes.
a. Assume that oll prices are expected to fall to $60.60 per barrel in 2019, $55.60 per barrel in 2020, and $50.60 per barrel in 2021.
After 2021, assume a long-term trend of oll-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.)
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 10% cost of capital?
O Yes
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