Book value ratio for comparable firms

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Reference no: EM13963245

You are trying to estimate a price per share on an IPO of a company involved in environmental waste disposal. The company has a book value per share of $20 and earned $3.50 per share in the most recent time period. Although it does not  pay dividends, the capital expenditures per share were $2.50 higher than depreciation per share in the most recent period, and the firm uses no debt financing. Analysts project that earnings for the company will grow 25 percent a year for the next five years. You have data on other companies in the environment waste disposal business:

Company

Price

BV/Share

EPS

DPS

Beta

Exp. Growth

Air & Water

$9.60

$8.48

$0.40

$0.00

1.65

10.5%

Allwaste

$5.40

$3.10

$0.25

$0.00

1.10

18.5%

Browning Ferris

$29.00

$11.50

$1.45

$0.68

1.25

11.0%

Chemical Waste

$9.40

$3.75

$0.45

$0.15

1.15

2.5%

Groundwater

$15.00

$14.45

$0.65

$0.00

1.00

3.0%

Intn'l Tech.

$3.30

$3.35

$0.16

$0.00

1.10

11.0%

Ionics

$48.00

$31.00

$2.20

$0.00

1.00

14.5%

Laidlaw

$6.30

$5.85

$0.40

$0.12

1.15

8.5%

OHM

$16.00

$5.65

$0.60

$0.00

1.15

9.50%

Rollins

$5.10

$3.65

$0.05

$0.00

1.30

1.0%

Safety-Kleen

$14.00

$9.25

$0.80

$0.36

1.15

6.50%

The average debt/equity ratio of these firms is 20 percent, and the tax rate is 40 percent.

a. Estimate the average price/book value ratio for these comparable firms. Would you use this average P/BV ratio to price the IPO?

b. What subjective adjustments would you make to the price/book value ratio for this firm and why?

Reference no: EM13963245

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