14. Richmond Rent-A-Car is about to go public. The investment banking firm of Tinkers, Evers and Chance is attempting to price the issue. The car rental industry generally trades at a 20 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:

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 half 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 half point will be deducted for an inferior comparison. On this basis, what should the initial P/E be for the firm?

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Growth rate in earnings per share.. Consistency of performance.. Debt to total assets Turnover of product... Quality of management Richmond 15% Increased earnings 4 out of 5 years Car Rental Industry 10% Increased earnings 3 out of 5 years 52% 39% Slightly below average Average High Average