Consider Pacific Energy Company and U.S. Bluechips, Inc., both of which reported earnings of $1.1 million. Without new projects, both firms will continue to generate earnings of $1.1 million 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 for each company?
b. Pacific Energy Company has a new project that will generate additional earnings of $220,000 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 $440,000 each year in perpetuity. Calculate the new PE ratio of the company.