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Consider Pacific Energy Company and U.S. Blue chips, Inc., both of which reported earnings of $750,000. Without new projects, both firms will continue to generate earnings of $750,000 in perpetuity. Assume that all earnings are paid as dividends and that both firms require a 14 percent rate of return.
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. Blue chips has a new project that will increase earnings by $200,000 in perpetuity. Calculate the new PE ratio of the firm.
If the before tax RD equals 8% and the firms’ tax rate equals 25%, how much is the Rre using the Bond-Yield-plus-Risk-Premium method?
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What information would you expect to find on each of a company’s financial statements? Provide examples of the various parties that use this information, and explain how they use the information.
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