5.31 Consider Pacific Energy Company and U.S. Bluechips, Inc., both of which reported recent earnings of $800,000 and have 500,000 shares of common stock outstanding. Assume both firms have the same required rate of return of 15 percent a year.

a. Pacific Energy Company has a new project that will generate cash flows of $100,000 each year in perpetuity. Calculate the P/E ratio of the company.

b. U.S. Bluechips has a new project that will increase earnings by $200,000 in the coming year. The increased earnings will grow at 10 percent a year in perpetuity. Calculate the P/E ratio of the firm.