Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.89 million barrels per year in 2016, 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 2016.

PP has 7.9 million shares outstanding. The cost of capital is 7%. All of PP's 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 2017, $55.90 per barrel in 2018, and $50.90 per barrel in 2019. After 2019, assume a long-term trend of oil-price increases at 3% per year. What is the ending 2016 value of one PP share?

b-1.What is PP's EPS/P ratio?

b-2.Is it equal to the 7% cost of capital?