Question

(PLEASE MAKE ANSWER CLEAR) Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.82 million barrels per year in 2016, but production is declining at 9% per year for the foreseeable future. Costs of production, transportation, and administration add up to $25.20 per barrel. The average oil price was $65.20 per barrel in 2016.

PP has 7.2 million shares outstanding. The cost of capital 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 $25.20. Also, ignore taxes.

a. Assume that oil prices are expected to fall to $60.20 per barrel in 2017, $55.20 per barrel in 2018, and $50.20 per barrel in 2019. After 2019, assume a long-term trend of oil-price increases at 7% per year. What is the ending 2016 value of 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 not round intermediate calculations. Round your answer to 3 decimal places.)

EPS/P ratio = ?

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

Answer 1

		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