Assignment:
Q: 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 index currently has a P/E ratio of 25. The firm can be compared to the car rental industry as follows:
|
Richmond |
Car Rental Industry |
| Growth rate in earnings per share |
15% |
10% |
| Consistency of performance |
Increased earnings
4 out of 5 years |
Increased earnings
3 out of 5 years |
| Debt to total assets |
35% |
40% |
| Turnover of product |
Slightly above 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 & Poor's 500 Index. Then a .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 .50 point will be deducted for an inferior comparison.
On this basis, what should the initial P/E be for the firm?