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Problem $4-26$ Valuing a business

Permian Partners $($PP$)$ produces from aging oil fields in west Texas. Production is currently $1\mathrm{.}97$ million barrels per year, but is declining at $9\%$ per year for the foreseeable future. Costs of production, transportation, and administration add up to $$26\mathrm{.}70$ per barrel. The current oil price is $$66\mathrm{.}70$ per barrel.

PP has $8\mathrm{.}7$ million shares outstanding. The cost of equity is $11\%.$ All of PP$$s net income is distributed as dividends. For simplicity, assume that the company will stay in business forever and that costs per barrel are constant at $$26\mathrm{.}70.$ Also, ignore taxes.

a$.$Assume that oil prices are expected to fall to $$61\mathrm{.}70$ per barrel next year, and to $$56\mathrm{.}70$ and $$51\mathrm{.}70$ per barrel in the two years following. After that decrease, assume a long$-$term trend of oil$-$price increases at $7\%$ per year. What is the value of one PP share?

b$-1.$What is PP$$s E$/$P ratio?

b$-2.$Is it equal to the $11\%$ cost of capital?