What should the initial p-e be for the firm

Assignment Help Financial Management

Reference no: EM132073760

Question :

Richmond Rent-A-Car is about to go public. The investment banking firm of Tinkers, Evers & Chance is attempting to price the issue.

The car rental industry generally trades at a 25 percent discount below the P/E ratio on the Standard & Poor's 500 Stock Index.

Assume that index currently has a P/E ratio of 25. The firm can be compared to the car rental industry as follows:

	Richmond	Car Rental Industry
Growth rate in earnings per share	15%	10%
Consistency of performance	Increased earnings 4 out of 5 years	Increased earnings 3 out of 5 years
Debt to total assets	35%	40%
Turnover of product	Slightly above average	Average
Quality of management	High	Average

Assume, in assessing the initial P/E ratio, the investment banker will first determine the appropriate industry P/E based on the Standard & Poor's 500 Index.

Then a .50 point will be added to the P/E ratio for each case in which Richmond Rent-A-Car is superior to the industry norm, and a .50 point will be deducted for an inferior comparison.

On this basis, what should the initial P/E be for the firm? (Round your answer to 1 decimal place.)

Reference no: EM132073760

Questions Cloud

Motivating desired performance : DMT Biotech is a biotechnology research and development company that designs products for the needs of life science researchers.

Is it worthwhile to buy the computer : The market value of the computer will be $61,000 in five years. The computer will replace 5 office employees whose combined annual salaries are $106,000.

How should katie treat receipt of partnership interest : Tara and Robert formed the TR Partnership four years ago. How should Katie treat the receipt of the partnership interest in the current year

Community values of the mirabal sisters : Examine one of the community values of the Mirabal sisters' village of Oyo de Agua and relate it to a similar value in your community.

What should the initial p-e be for the firm : Assume, in assessing the initial P/E ratio, the investment banker will first determine the appropriate industry P/E based on the Standard & Poor's 500 Index.

Hrm problems and expatriate assignments : "HRM Problems and Expatriate Assignments" Determine two (2) HRM problems that typically arise with expatriate assignments.

How much income must donald report for the tax year : Partner Donald owns a 50% interest in the partnership. How much income must Donald report for the tax year

How would bond values change over time : As a bond investor, what measures would you take to manage rate risk? how would bond values change over time?

Improve faster than customer requirements : What are the advantages and disadvantages to a firm of developing a technology beyond the current state of market needs?

User Account

All Pages