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(PLEASE MAKE ANSWER CLEAR) Permian Partners (PP) produces from aging oil fields in west Texas. Production...

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Finance

(PLEASE MAKE ANSWER CLEAR) Permian Partners (PP) produces fromaging oil fields in west Texas. Production is 1.82 million barrelsper year in 2016, but production is declining at 9% per year forthe foreseeable future. Costs of production, transportation, andadministration add up to $25.20 per barrel. The average oil pricewas $65.20 per barrel in 2016.

PP has 7.2 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 $25.20. Also, ignoretaxes.

a. Assume that oil prices are expected to fallto $60.20 per barrel in 2017, $55.20 per barrel in 2018, and $50.20per barrel in 2019. After 2019, assume a long-term trend ofoil-price increases at 7% per year. What is the ending 2016 valueof one PP share? (Do not round intermediate calculations.Round your answer to 2 decimal places.)

Share value2016 = ?

b-1. What is PP’s EPS/P ratio? (Do notround intermediate calculations. Round your answer to 3 decimalplaces.)

EPS/P ratio = ?

b-2. Is it equal to the 11% cost ofcapital?

Answer & Explanation Solved by verified expert
4.1 Ratings (778 Votes)

2016
Production (units) 1820000
Cost of production (25.2*1820000) $    4,58,64,000.00
total earning from oil (65.2*1820000) $ 11,86,64,000.00
profit available for dividend earning - cost $    7,28,00,000.00
No of shareholders given            72,00,000.00
earning per share profit / number of shares                           10.11
capitalized value profit available for dividend/ rate of return
=72800000/11%		 661818181.8
value of share capitalized value / number of shares                           91.92
EPS/P earning per share / value of share                             0.11

So, a). value of share at the end of 2016,= $91.92

b). EPS/P ratio = 0.11

c). yes, it is the same
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