Richmond Rent-A-Car is about to go public. The investment bankingfirm of Tinkers, Evers & Chance is attempting to price the issue. The carrental industry generally trades at a 20 percent discount below the P/Eratio on the Standard & Poor's 500 Stock Index. Assume that indexcurrently has a P/E ratio of 25. The firm can be compared to the carrental industry as follows:Growth ratein earningsper shareConsistencyofperformanceDebt to totalassetsTurnover ofproductQuality ofmanagementRichmond15%Increased earnings4 out of 5 years52%Car Rental Industry10%HighIncreased earnings3 out of 5 years39%Slightly below average AverageAverageAssume, in assessing the initial P/E ratio, the investment banker willfirst 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 foreach case in which Richmond Rent-A-Car is superior to the industrynorm, and a half point will be deducted for an inferior comparison. Onthis basis, what should the initial P/E be for the firm?

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 Richmond 15% Car Rental Industry 10%

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 Richmond 15% Car Rental Industry 10%

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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