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Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.97 million barrels...

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Finance

Permian Partners (PP) produces from aging oil fields in westTexas. Production is 1.97 million barrels per year in 2016, butproduction is declining at 9% per year for the foreseeable future.Costs of production, transportation, and administration add up to$26.70 per barrel. The average oil price was $66.70 per barrel in2016. PP has 8.7 million shares outstanding. The cost of capital is11%. All of PP’s net income is distributed as dividends. Forsimplicity, assume that the company will stay in business foreverand that costs per barrel are constant at $26.70. Also, ignoretaxes. a. Assume that oil prices are expected to fall to $61.70 perbarrel in 2017, $56.70 per barrel in 2018, and $51.70 per barrel in2019. After 2019, assume a long-term trend of oil-price increasesat 7% per year. What is the ending 2016 value of one PP share?Share Value= b-1. What is PP’s EPS/P ratio? b-2. Is it equal to the11% cost of capital? Yes or no

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