20–3)

New Stock Issue The Edelman Gem Company, a small jewelry manufacturer, has been successful and has enjoyed a good growth trend. Now Edelman is planning to go public with an issue of common stock, and it faces the problem of setting an appropriate price for the stock. The company and its investment banks believe that the proper procedure is to select several similar firms with publicly traded common stock and to make relevant comparisons.

Several jewelry manufacturers are reasonably similar to Edelman with respect to product mix, asset composition, and debt/equity proportions. Of these companies, Kennedy Jewelers and Strasburg Fashions are most similar. When analyzing the following data, assume that 2005 and 2010 were reasonably “normal” years for all three companies—that is, these years were neither especially good nor especially bad in terms of sales, earnings, and dividends. At the time of the analysis, rRF was 8% and RPM was 4%. Kennedy is listed on the AMEX and Strasburg on the NYSE, while Edelman will be traded in the Nasdaq market.

Kennedy Strasburg Edelman

(Totals)

Earnings per share*

2010 $ 4.50 $ 7.50 $ 1,200,000 2005 3.00 5.50 816,000 Price per share*

2010 $ 36.00 $ 65.00 —

Dividends per share*

2010 $ 2.25 $ 3.75 $ 600,000 2005 1.50 2.75 420,000 Book value per share, 2010* $ 30.00 $ 55.00 $ 9 million Market/book ratio, 2010 120% 118% —

Total assets, 2010 $28 million $ 82 million $20 million Total debt, 2010 $12 million $ 30 million $11 million Sales, 2010 $41 million $140 million $37 million

*The data are on a per share basis for Kennedy and Strasburg but are totals for Edelman.