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Price-Earnings Ratio Consider Pacific Energy Company and Atlantic Energy, Inc., both of which reported earnings of $720,000.

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Answer #1

a)
Total dividends = $720,000
Required rate of return = 11%
Current market value of shares= Total dividends / Required rate of return
= $720,000 / 0.11
= $6,545,454.545
Current PE ratio = Total market value / Total earnings
= $6,545,454.545 / $720,000
= 9.0909 times

b)
Total earnings = Existing earnings + additional earnings
= $720,000 + $150,000
= $870,000
Market value of shares = $870,000 / 0.11
= $7,909,090.909
New PE ratio = $7,909,090.909 / $870,000
= 9.0909 times

c)
New earnings = $720,000 + $300,000
= $1,020,000
Market value of shares = $1,020,000 / 0.11
= $9,272,727.273
New PE ratio = $9,272,727.273 / $1,020,000
= 9.0909 times

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