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5.29 Consider Pacific Energy Company and U.S. Bluechips, Inc., both of which reported earnings of $1.1 million. Without new projects, both firms will continue to

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5.29 Consider Pacific Energy Company and U.S. Bluechips, Inc., both of which reported earnings of $1.1 million. Without new projects, both firms will continue to generate earnings of $1.1 million in perpetuity. Assume that all earnings are paid as dividends and that both firms require a return of 12 percent. What is the value of the firm's equity and current PE for each company according to the DDM model? (Hint: You can also compute PE by dividing total equity value by total earnings) Pacific Energy Company has a new project that will generate additional earnings of $220,000 each year in perpetuity. Calculate the new PE ratio of the company. U.S. Bluechips has a new project that will increase earnings (and dividends) by $440,000 each year in perpetuity. Calculate the current equity value using a constant perpetual growth DDM. Calculate the new PE ratio of the company with the new projects. Current Equ ty y Current PE New PE Earnings (m) Payout $1.10 100% $1.10 100% Pacific Energy J.S. Blue Chip 12% 12%

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