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Problem 15-15 P/E ratio for new public issue [LO15-2] Richmond Rent-A-Car is about to go public. The investment banking firm of Tinkers, Evers & Chance
Problem 15-15 P/E ratio for new public issue [LO15-2] 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 the index currently has a P/E ratio of 30. The firm can be compared to the car rental industry as follows: Growth rate in earnings per share Consistency of performance Richmond 148 Increased earnings 4 out of 5 years 35% Slightly above average High Car Rental Industry 108 Increased earnings 3 out of 5 years Debt to total assets Turnover of product Quality of management Average 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 0.50 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 0.50 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.) Initial P/E ratio
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