Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.83 million barrels per year in 2018, but production is declining at 6% per year for the foreseeable future. Costs of production, transportation, and administration add up to $25.30 per barrel. The average oil price was $65.30 per barrel in 2018.

PP has 7.3 million shares outstanding. The cost of capital is 8%. 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 $25.30. Also, ignore taxes.

a. Assume that oil prices are expected to fall to $60.30 per barrel in 2019, $55.30 per barrel in 2020, and $50.30 per barrel in 2021. After 2021, assume a long-term trend of oil-price increases at 4% per year. What is the ending 2018 value of one PP share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b-1. What is PPs EPS/P ratio? (Do not round intermediate calculations. Round your answer to 4 decimal places.)

b-2. Is it equal to the 8% cost of capital?

multiple choice

• Yes
• No