Ashley Homebuilding is about to go public. The investment firm of Blake, Webber, and Company is attempting to price the issue. The home building industry generally trades at a 22 percent discount below the P/E ratio on the S&P/TSX Composite Index. Assume that index currently has a P/E ratio of 25. The firm can be compared to the home building industry as follows: Growth rate in earnings per share Consistency of performance Debt to total assets Turnover of product Quality of management Ashley 11 percent Increased earnings 2 out of 5 years 25 percent Slightly above avg High Home building Industry 10 percent Increased earnings 3 out of 5 years 40 percent Average Average Assume, in assessing the initial P/E ratio, the investment dealer will first determine the appropriate industry P/E based on the S&P/TSX Composite Index. Then a half point will be added to the P/E ratio for each case in which Ashley Homebuilding is superior to the industry norm, and a half point will be deducted for an inferior comparison. What should the initial P/E be for the firm? (Round the final answer to 2 decimal places.) Initial P/E ratio

Ashley Homebuilding is about to go public. The investment firm of Blake, Webber, and Company is attempting to price the issue. The home building industry generally trades at a 22 percent discount below the P/E ratio on the S&P/TSX Composite Index. Assume that index currently has a P/E ratio of 25. The firm can be compared to the home building industry as follows: Growth rate in earnings per share Consistency of performance Debt to total assets Turnover of product Quality of management Ashley 11 percent Increased earnings 2 out of 5 years 25 percent Slightly above avg High Home building Industry 10 percent Increased earnings 3 out of 5 years 40 percent Average Average Assume, in assessing the initial P/E ratio, the investment dealer will first determine the appropriate industry P/E based on the S&P/TSX Composite Index. Then a half point will be added to the P/E ratio for each case in which Ashley Homebuilding is superior to the industry norm, and a half point will be deducted for an inferior comparison. What should the initial P/E be for the firm? (Round the final answer to 2 decimal places.) Initial P/E ratio

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter13: Valuation: Earnings-based Approach

Section: Chapter Questions

Problem 13PC

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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 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. The firm can be compared to the car rental industry as follows: Growth rate in earnings per share Consistency of performance Debt to total assets Turnover of product Quality of management Richmond 15% Increased earnings 4 out of 5 years 52% Car Rental Industry 10% High Increased earnings 3 out of 5 years 39% Slightly below average Average 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 half 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 half point will be deducted for an inferior…
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 the index currently has a P/E ratio of 25. The firm can be compared to the car rental industry as follows: Growth rate in earnings per share Consistency of performance Debt to total assets Turnover of product Quality of management 12% Initial P/E ratio Richmond Increased earnings 4 out of 5 years 368 slightly below average High Car Rental Industry Increased earnings 3 out of 5 years 40% Average 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 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…
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 10 percent discount below the P/E ratio on the Standard & Poor's 500 Stock Index. Assume that the index currently has a P/E ratio of 20. The firm can be compared to the car rental industry as follows: Growth rate in earnings per share Consistency of performance Debt to total assets Turnover of product Quality of management 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 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? Note: Round your answer to 1 decimal place. Answer is complete but not entirely correct.…
3 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 the index currently has a P/E ratio of 25. The firm can be compared to the car rental industry as follows: nts Growth rate in earnings per share Consistency of performance Debt to total assets Turnover of product Quality of management Richmond 15% Answer is complete but not entirely correct. Initial P/E ratio Increased earnings 4 out of 5 years 35% Slightly above average High 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 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.…
Bunkhouse Electronics is a recently incorporated firm that makes electronic entertainment systems. Its earnings and dividends have been growing at a rate of 38.5%, and the current dividend yield is 10.50%. Its beta is 1.37, the market risk premium is 16.50%, and the risk-free rate is 2.30%. a. Use the CAPM to estimate the firm's cost of equity. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Cost of equity % b. Now use the constant growth model to estimate the cost of equity. (Do not round intermediate calculations. Enter your answer as a whole percent.) Cost of equity % c. Which of the two estimates is more reasonable?
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Castle-in-Sand generates a rate of return of 20% on its investments and maintains a plowback ratio of 0.30. Its earnings this year will be $4 per share. Investors expect a 12% rate of return on the stock. Required: (a.) Find the price and P/E ratio of the firm. (b.) What happens to the P/E ratio if the plowback ratio is reduced to 0.20? Why? (c.) Show that if plowback equals zero, the earnings-price ratio, E/P, falls to the expected rate of return on the stock.
Garret Simpson Investments is evaluating a firm (Garp, Inc.) for recommendation to its clients and trying to evaluate the firm's current stock price. The firm is about to offer its shares to the public and had earnings last year of $2.50 a share, which the analysts believe is expected to grow by 20% next year. Similar firms in the industry are currently selling for price-earnings ratios ranging from ten to fifteen times current period earnings. However, these competitor firms are already public entities and have relatively low growth expectations for their earnings. What is your estimate of an appropriate price range for the shares of Garp? Defend your answer.