both of which reported earnings of $630,000. Without new projects, both firms will

continue to generate earnings of $630,000 in perpetuity. Assume that all earnings are

paid as dividends and that both firms require a return of 11 percent.

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 earnings by $200,000 in perpetu

ity. Calculate the new PE ratio of the firm.