Question

Problem 18-4 New Stock Issue

Bynum and Crumpton Inc. (B&C), a small jewelry manufacturer, has been successful and has enjoyed a positive growth trend. Now B&C 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 conduct a valuation and select several similar firms with publicly traded common stock and to make relevant comparisons. Several jewelry manufacturers are reasonably similar to B&C with respect to product mix, asset composition, and debt/equity proportions. Of these companies, Abercrombe Jewelers and Gunter Fashions are most similar. When analyzing the following data, assume that the most recent year has been reasonably "normal" in the sense that it was neither especially good nor especially bad in terms of sales, earnings, and free cash flows. Abercrombe is listed on the AMEX and Gunter on the NYSE, while B&C will be traded in the Nasdaq market.

Company data	Abercrombe		Gunter		B&C
Shares outstanding	4 million		10 million		500,000
Price per share	$31.00		$52.00		NA
Earnings per share	$2.20		$3.13		$2.60
Free cash flow per share	$1.63		$2.54		$2.00
Book value per share	$17.00		$24.00		$18.00
Total assets	$103 million		$290 million		$11 million
Total debt	$35 million		$50 million		$3 million

Calculate debt to total assets, P/E, market to book, P/FCF, and ROE for Abercrombe, Gunter, and B&C. For calculations that require a price for B&C, use the per share price you obtained with the corporate valuation model in part a. Round your answers to two decimal places. Round ROE to one decimal place.

	Abercrombe		Gunter		B&C
D/A	%		%		%
P/E
Market/Book
ROE	%		%		%
P/FCF