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 shareConsistency of performanceDebt to total assetsTurnover of productQuality of management12%Initial P/E ratioRichmondIncreased earnings4 out of 5 years368slightly below averageHighCar Rental IndustryIncreased earnings3 out of 5 years40%AverageAverage™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 theindustry 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? (Round your answer to 1 decimal place.)< PrevAAAAAAAAAAAAAA7 of 10Next

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 Richmond Initial P/E ratio 128 Increased earnings 4 out of 5 years. 36% slightly below average High Car Rental Industry 10% 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 for an inferior comparison. On this basis, what should the initial P/E be for the firm? (Round your answer to 1 decimal place.)

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 Richmond Initial P/E ratio 128 Increased earnings 4 out of 5 years. 36% slightly below average High Car Rental Industry 10% 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 for an inferior comparison. On this basis, what should the initial P/E be for the firm? (Round your answer to 1 decimal place.)

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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You are going to value Lauryn's Doll Co. using the FCF model. After consulting various sources, you find that Lauryn's has a reported equity beta of 1.4, a debt-to-equity ratio of .4, and a tax rate of 21 percent. Assume a risk-free rate of 4 percent and a market risk premium of 8 percent. Lauryn's Doll Co. had EBIT last year of $41 million, which is net of a depreciation expense of $4.1 million. In addition, Lauryn's made $4 million in capital expenditures and increased net working capital by $2.0 million. Assume the FCF is expected to grow at a rate of 2 percent into perpetuity. What is the value of the firm? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) X Answer is complete but not entirely correct. Firm value $ 310.99 X million
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.…
You are an analyst at Apex Innovations, known for its cutting-edge technology in the renewable energy sector. Apex is considering moving into high-energy batteries. You have been assigned to determine the leverage beta for this new division. Apex, plans to maintain a target debt-to-equity ratio of 1.88. We comparing other companies in the high-energy battery sector, you learned the average beta is 0.83 and the industry's average debt-to-equity ratio is 1.56. The tax rate for Apex and the high energy battery sector is 25%. What is the industry's unleverage beta? What is the new division's leverage beta?
You are going to value Lauryn’s Doll Co. using the FCF model. After consulting various sources, you find that Lauryn's has a reported equity beta of 1.7, a debt-to-equity ratio of .7, and a tax rate of 21 percent. Assume a risk-free rate of 3 percent and a market risk premium of 8 percent. Lauryn’s Doll Co. had EBIT last year of $59 million, which is net of a depreciation expense of $5.9 million. In addition, Lauryn's made $7.3 million in capital expenditures and increased networking capital by $2.4 million. Assume the FCF is expected to grow at a rate of 4 percent into perpetuity. What is the value of the firm?
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Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $183,000 per year. The cost of equity is 13.1 percent and the tax rate is 21 percent. The firm can borrow perpetual debt at 6.3 percent. Currently, the firm is considering converting to a debt–equity ratio of .93. What is the firm's levered value? MM assumptions hold. A. $829,786 B. $1,215,262 C. $1,155,579 D. $997,511 E. $921,985
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You are going to value Lauryn's Doll Company using the FCF model. After consulting various sources, you find that Lauryn's has a reported equity beta of 1.6, a debt-to-equity ratio of 0.6, and a tax rate of 21 percent. Assume a risk-free rate of 6 percent and a market risk premium of 8 percent. Lauryn's Doll Company had EBIT last year of $53 million, which is net of a depreciation expense of $5.3 million. In addition, Lauryn's made $4.75 million in capital expenditures and increased net working capital by $3.1 million. Assume the FCF is expected to grow at a rate of 2 percent into perpetuity. What is the value of the firm? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. > Answer is complete but not entirely correct. Firm value $ 326.94 million
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You are considering investing in Dakota's Security Services. You have been able to locate the following information on the firm: Total assets are $32.6 million, accounts receivable are $4.46 million, ACP is 25 days, net income is $4.83 million, and debt-to-equity is 1.3 times. All sales are on credit. Dakota's is considering loosening its credit policy such that ACP will increase to 30 days. The change is expected to increase credit sales by 6 percent. Any change in accounts receivable will be offset with a change in debt. No other balance sheet changes are expected. Dakota's profit margin will remain unchanged. How will this change in accounts receivable policy affect Dakota's net income, total asset turnover, equity multiplier, ROA, and ROE? Note: Do not round intermediate calculations. Enter your answer in millions of dollars. Round your answers to 2 decimal places. Use 365 days a year. Net income Total asset turnover Equity multiplier ROA ROE million times times % %
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High Adventure is considering a new project that is similar in risk to the firm's current operations. Thefirm maintains a debt-equity ratio of .55 and retains all profits to fund the firm's rapid growth. Howshould the firm determine its cost of equity?Select one:a. By averaging the costs based on the dividend growth model and the capital asset pricing model.b. By adding the market risk premium to the after tax cost of debt.c. By using the dividend growth model.d. By using the capital asset pricing model.e. By multiplying the market risk premium by 1.55

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