Answered step by step
Verified Expert Solution
Question
1 Approved Answer
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
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%
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started