26. Valuing a business (S4.6) Permian Partners (PP) produces from aging oil fields in west Texas. Production is currently 1.8 million barrels per year, but is declining at 7% per year for the foreseeable future. Costs of production, transportation, and administration add up to $25 per barrel. The current oil price is $65 per barrel. PP has 7 million shares outstanding. The cost of equity 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 value of one PP share? Assume that oil prices are expected to fall to $60 per barrel next year, and to $55 and $50 per barrel in the two years following. After that decrease, assume a long-term trend of oil-price increases at 5% per year.