Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 4, Problem 25PS

DCF and free cash flow Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.8 million barrels per year in 2016, but production is declining at 7% per year for the foreseeable future. Costs of production, transportation, and administration add up to $25 per barrel. The average oil price was $65 per barrel in 2016.

PP has 7 million shares outstanding. The cost of capital is 9%. 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 $25. Also, ignore taxes.

  1. a. What is the ending 2016 value of one PP share? Assume that oil prices are expected to fall to $60 per barrel in 2017, $55 per barrel in 2018, and $50 per barrel in 2019. After 2019, assume a long-term trend of oil-price increases at 5% per year.
  2. b. What is PP’s EPS/P ratio and why is it not equal to the 9% cost of capital?
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Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.81 million barrels per year in 2018, but production is declining at 8% per year for the foreseeable future. Costs of production, transportation, and administration add up to $25.10 per barrel. The average oil price was $65.10 per barrel in 2018. PP has 7.1 million shares outstanding. The cost of capital is 10%. 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 $25.10. Also, ignore taxes. a. Assume that oil prices are expected to fall to $60.10 per barrel in 2019, $55.10 per barrel in 2020, and $50.10 per barrel in 2021. After 2021, assume a long-term trend of oil-price increases at 6% per year. What is the ending 2018 value of one PP share? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Share value 2016 L b-1. What is PP's EPS/P ratio? (Do not round…
Permian Partners (PP) produces from aging oil fields in west Texas. Production is currently 1.94 million barrels per year, but is declining at 5% per year for the foreseeable future. Costs of production, transportation, and administration add up to $26.40 per barrel. The current oil price is $66.40 per barrel.   PP has 8.4 million shares outstanding. The cost of equity is 7%. 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 $26.40. Also, ignore taxes.   a.Assume that oil prices are expected to fall to $61.40 per barrel next year, and to $56.40 and $51.40 per barrel in the two years following. After that decrease, assume a long-term trend of oil-price increases at 3% 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 7% cost of capital?
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Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)

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