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Problem 15-15 (Algo) P/E ratio for new public issue [LO15-2] 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 the index currently has a P/E ratio of 30. The firm can be compared to the car rental industry as follows: Car Rental Industry 10% Growth rate in earnings per share Consistency of performance Debt to total assets Turnover of product Richmond 12% Increased earnings 4 out of 5 years Increased earnings 3 out of 5 years 32% Slightly above average High 40% Average Quality of management 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 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. Initial P/E ratio

Problem 15-15 (Algo) P/E ratio for new public issue [LO15-2] 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 the index currently has a P/E ratio of 30. The firm can be compared to the car rental industry as follows: Car Rental Industry 10% Growth rate in earnings per share Consistency of performance Debt to total assets Turnover of product Richmond 12% Increased earnings 4 out of 5 years Increased earnings 3 out of 5 years 32% Slightly above average High 40% Average Quality of management 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 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. Initial P/E ratio

Fundamentals of Financial Management, Concise Edition (MindTap Course List)
Fundamentals of Financial Management, Concise Edition (MindTap Course List)
9th Edition
ISBN:9781305635937
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter17: Multinational Financial Management
Section: Chapter Questions
Problem 4DQ
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Problem 15-15 (Algo) P/E ratio for new public issue [LO15-2] 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 the index currently has a P/E ratio of 30. The firm can be compared to the car rental industry as follows: Car Rental Industry 10% Growth rate in earnings per share Consistency of performance Debt to total assets Turnover of product Richmond 12% Increased earnings 4 out of 5 years Increased earnings 3 out of 5 years 32% Slightly above average High 40% Average Quality of management 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 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. Initial P/E ratio
Transcribed Image Text:Problem 15-15 (Algo) P/E ratio for new public issue [LO15-2] 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 the index currently has a P/E ratio of 30. The firm can be compared to the car rental industry as follows: Car Rental Industry 10% Growth rate in earnings per share Consistency of performance Debt to total assets Turnover of product Richmond 12% Increased earnings 4 out of 5 years Increased earnings 3 out of 5 years 32% Slightly above average High 40% Average Quality of management 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 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. Initial P/E ratio
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