Consider Pacific Energy Company and U.S. Bluechips, Inc., both of which reported earnings of $1.4 million. Without new projects, both firms will continue to generate earnings of $1.4 million in perpetuity. Assume that all earnings are paid as dividends and that both firms require a return of 12 percent.

a. What is the current PE for each company?

b. Pacific Energy Company has a new project that will generate additional earnings of $330,000 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 $660,000 each year in perpetuity. Calculate the new PE ratio of the company.