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 Richmond 13% Increased earnings 4 out of 5 years 30% 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. 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. Initial P/E ratio 19.5 X Car Rental Industry 10% Increased earnings 3 out of 5 years 40% Average Average
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 Richmond 13% Increased earnings 4 out of 5 years 30% 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. 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. Initial P/E ratio 19.5 X Car Rental Industry 10% Increased earnings 3 out of 5 years 40% Average Average
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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![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.
Richmond
13%
Increased earnings 4 out of 5 years
30%
Slightly above average
High
Initial P/E ratio
19.5
Car Rental Industry
10%
Increased earnings 3 out of 5 years
40%
Average
Average](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ffc8ffaf8-ba67-424b-bc42-2736766b525e%2F7fd3ec0a-35b3-4bfd-b48e-220175b28c2f%2Fedgkhy4_processed.png&w=3840&q=75)
Transcribed Image Text: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.
Richmond
13%
Increased earnings 4 out of 5 years
30%
Slightly above average
High
Initial P/E ratio
19.5
Car Rental Industry
10%
Increased earnings 3 out of 5 years
40%
Average
Average
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