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
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.
- 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.
- 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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Chapter 4 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 4 - True/false True or false? a. All stocks in an...Ch. 4 - Dividend discount model Respond briefly to the...Ch. 4 - Dividend discount model Company X is expected to...Ch. 4 - Dividend discount model Company Y does not plow...Ch. 4 - Constant-growth DCF model Company Zs earnings and...Ch. 4 - Dividend discount model Company Z-prime is like Z...Ch. 4 - Dividend discount model If company Z (see Problem...Ch. 4 - Prob. 8PSCh. 4 - Prob. 9PSCh. 4 - Free cash flow Under what conditions does r, a...
Ch. 4 - Prob. 11PSCh. 4 - Prob. 12PSCh. 4 - Horizon value Suppose the horizon date is set at a...Ch. 4 - Stock quotes Go to finance.yahoo.com and get...Ch. 4 - Two-stage DCF model Consider the following three...Ch. 4 - Constant-growth DCF model Pharmecology just paid...Ch. 4 - Two-stage DCF model Company Qs current return on...Ch. 4 - Cost of equity capital Each of the following...Ch. 4 - Growth opportunities Alpha Corps earnings and...Ch. 4 - Prob. 23PSCh. 4 - Two-stage DCF model Compost Science Inc. (CSI) is...Ch. 4 - DCF and free cash flow Permian Partners (PP)...Ch. 4 - DCF and free cash flow Construct a new version of...Ch. 4 - Valuing a business Mexican Motors market cap is...Ch. 4 - Valuing Tree cash flow Phoenix Corp. faltered in...Ch. 4 - Constant-growth DCF formula The constant-growth...Ch. 4 - DCF valuation Portfolio managers are frequently...Ch. 4 - Valuing a business Construct a new version of...
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