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
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 15 percent discount below the P/E ratio on the Standard & Poors 500 Stock Index. Assume that the index currently has a P/E ratio of 15. The firm can be compared to the car rental industry as follows:
Richmond | Car Rental Industry | |
---|---|---|
Growth rate in earnings per share | 12% | 10% |
Consistency of performance | Increased earnings 4 out of 5 years | Increased earnings 3 out of 5 years |
Debt to total assets | 25% | 40% |
Turnover of product | Slightly below 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 & Poors 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?
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