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Consider Bultaco Company and U.S. Honda, Inc., both of which reported earnings of $1,000,000. Without...

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Finance

Consider Bultaco Company and U.S. Honda, Inc., both of which reported earnings of $1,000,000. Without new projects, both firms will continue to generate earnings of $1,000,000 in perpetuity. Assume that all earnings are paid as dividends and that both firms require a return of 15 percent.

U.S. Honda has a new project that will increase earnings by $400,000 in perpetuity. Calculate the new PE ratio of the firm.

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