Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.89 million barrels per year in 2013, but production is declining at 5% per year for the foreseeable future. Costs of production, transportation, and administration add up to $25.90 per barrel. The average oil price was $65.90 per barrel in 2013.

PP has 7.9 million shares outstanding. The cost of capital is 7%. All of PPs net income is distributed as dividends. For simplicity, assume that the company will stay in business forever and that costs per barrel are constant at $25.90. Also, ignore taxes.

a.

Assume that oil prices are expected to fall to $60.90 per barrel in 2014, $55.90 per barrel in 2015, and $50.90 per barrel in 2016. After 2016, assume a long-term trend of oil-price increases at 3% per year. What is the PV of a PP share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Present value per share

$

b-1.	What is PPs EPS/P ratio? (Do not round intermediate calculations. Round your answer to 3 decimal places.)

EPS/P ratio

b-2.

Is it equal to the 7% cost of capital?

	Yes
	No