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 12 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 15. 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 14% > Answer is complete but not entirely correct. Initial P/E ratio Increased earnings 4 out of 5 years 35% Slightly below 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. 15.3 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 12 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 15. 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 14% > Answer is complete but not entirely correct. Initial P/E ratio Increased earnings 4 out of 5 years 35% Slightly below 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. 15.3 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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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 12 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 15. 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
X Answer is complete but not entirely correct.
Richmond
14%
Initial P/E ratio
Increased earnings 4 out of 5 years
On this basis, what should the initial P/E be for the firm?
Note: Round your answer to 1 decimal place.
15.3 x
35%
Slightly below 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.
Car Rental Industry
10%
Increased earnings 3 out of 5 years
40%
Average
Average
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