(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?
