Question: Rodgers Homebuilding is about to go public. The investment banking firm of Leland Webber and Company is attempting to price the issue. The homebuilding 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. Rodgers can be compared to the homebuilding 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 ½ point will be added to the P/E ratio for each case in which Rodgers is superior to the industry norm, and ½ point will be deducted for an inferior comparison. On this basis, what should the initial P/E be for Rodgers Homebuilding?