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Consider Pacific Energy Company and U.S. Bluechips, Inc., both of which reported earnings of $966,000. Without new projects, both firms will continue to generate earnings of $966,000 in perpetuity. Assume that all earnings are paid as dividends and that both firms require a return of 12 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 $116,000 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 $216,000 in perpetuity. Calculate the new PE ratio of the firm.
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The task is about the financial management. The calculation of the price earning ratio has been done in the various scenarios. The clear formulas for the calculation of the same has been involved in the solution.
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