ncesRichmond 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 17 percent discount below the P/E ratio on the Standard & Poor's 500 Stock Index. Assumethat the index currently has a P/E ratio of 30. The firm can be compared to the car rental industry as follows:Growth rate in earnings per shareRichmond12%Increased earnings 4 out of 5 years36%slightly below averageHighCar Rental Industry10%Increased earnings 3 out of 5 years40%Consistency of performanceDebt to total assetsTurnover of productQuality of managementAverageAverageAssume, 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?Note: Round your answer to 1 decimal place.Initial P/E ratio

The price-to-earnings (P/E) ratio isused to evaluate the relative value of a company's stock price…

Richmond Rent-A-Car is about to go public. The investment banking firm of Tinkers, Evers & Chance is attempting The car rental industry generally trades at a 17 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: Growth rate in earnings per share Car Rental Industry 10% Richmond 12% Increased earnings 4 out of 5 years 36% Increased earnings 3 out of 5 years 40% slightly below average High Consistency of performance Debt to total assets Turnover of product Quality of management 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? Note: Round your answer to 1 decimal place. Initial P/E ratio

Richmond Rent-A-Car is about to go public. The investment banking firm of Tinkers, Evers & Chance is attempting The car rental industry generally trades at a 17 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: Growth rate in earnings per share Car Rental Industry 10% Richmond 12% Increased earnings 4 out of 5 years 36% Increased earnings 3 out of 5 years 40% slightly below average High Consistency of performance Debt to total assets Turnover of product Quality of management 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? Note: Round your answer to 1 decimal place. Initial P/E ratio

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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2. You are an equity analyst examining a firm that is currently trading at $40/share. The consensus market estimates for EPS (Earnings Per Share) for the next three years are $2 next year and $3 the year after and $4 the year after that (year 3). You believe these EPS estimates are accurate. Other similar firms trade at a P/E multiple of 12.5 with an expected average long term growth rate estimate starting today of 4%. Assume all earnings are paid out in dividends. a. If you believe your stock reaches steady state and will grow from then like other similar firms today, would you recommend buying the shares at the current stock price? b. After the first year once the dividend is paid, the stock price increases to $55 as it becomes known to everyone that the long term growth rate will actually be 1% more (5%). Ignoring tax issues, would you recommend buy, hold or sell of the stock at that time?
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.…
Growth firm
1. Toiletry Products, Inc. manufactures diapers. As their target customers age and pass on, sales of the product are expected to increase. Past statistics suggest that earnings and dividends will increase at a rate of 4% annually forever. The firm just paid a dividend of $2.50. Given a required return of 12%, the stock should sell for a $10.25 b. $12.50 c. $15.00 d. $16.25 e. $32.50
We are trying to value the technology company B&B's share price. If the appropriate industry PE for this type of company is 5 and you predict net income for B&B to be $3 million for the coming year. Assuming the firm has 1 million shares of common stock. What is the forecasted stock price for a year from now? $3 $10 $8 $15
Do not use Excel or Matrix You have to show your work 6. Sun Co., an electronics product manufacturer, is expecting to pay a dividend of $2 per share this year (end of the year, at t = 1). Based on market research for its products and production costs, Sun expects the dividend to grow at the rate of 15% per year in years two and three. Subsequently, the growth will be closer to the industry average, which is 4%. Sun’s cost of equity is 13%, what must be the a. value of each share three years from now, after the dividend for the third year is paid? b. value of each share now?
Web Cites Research projects a rate of return of 20% on new projects. Management plans to plow back 30% of all earnings into the firm. Earnings this year will be $2 per share, and investors expect a 12% rate of return on the stock. a. What is the sustainable growth rate? (Round your answer to 2 decimal places.) Sustainable growth rate Stock price b. What is the stock price? (Round your answer to the nearest cent.) % Present value of growth opportunities ▸ c. What is the present value of growth opportunities? (Do not round Intermediate calculations. Round your answer to the nearest cent.) P/E ratio d. What is the P/E ratio? (Do not round Intermediate calculations. Round your answer to 3 decimal places.)

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