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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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