Price–Earnings Ratio Consider Pacific Energy Company and U.S. Bluechips, Inc., both of which reported earnings of $800,000. Without new projects, both firms will continue to generate earnings of $800,000 in perpetuity. Assume that all earnings are paid as dividends and that both firms require a 15 percent rate of return.

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

b. Pacific Energy Company has a new project that will generate additional earnings of

$100,000 each year in perpetuity. Calculate the new PE ratio of the company.

c. U. S. Bluechips has a new project that will increase by $200,000 in perpetuity. Calculate the new PE ratio of the firm. LO.1