Foundations of Financial Management
16th Edition
ISBN: 9781259277160
Author: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Publisher: McGraw-Hill Education
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Question
Chapter 15, Problem 15P
Summary Introduction
To calculate: The initial P/E ratio of Richmond Rent-A-Car.
Introduction:
P/E ratio:
It is computed by current share price divided by its EPS. It helps in valuing a company’s profitability in the present as well as in the future.
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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 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.…
A private firm with investment in many industries is considering investing in the fast-food industry. Looking at data on publicly traded fast food companies, an analyst discovers the following information for McDonald’s and Wendy’s International. Equity beta D/E McDonald’s 0.90 0.60 Wendy’s 0.70 0.45 In addition, the analyst has the following information from financial markets: 1. The risk-free rate of interest is 3%. 2. The market risk premium is 6%. 3. The corporate tax rate is 20% for all firms. 4. The project will be financed with 40% debt and 60% equity. 5. The private company can borrow long-term debt at 6% interest. Calculate the discount rate for an investment in the fast-food business. (
Beagle Beauties engages in the development, manufacture, and sale of a line of cosmetics designed to make your dog look
glamorous. Below you will find selected information necessary to compute some valuation estimates for the firm. Assume the values
provided are from year-end 2021. Also assume that the firm's equity beta is 1.40, the risk-free rate is 2.75 percent, and the market risk
premium is 7 percent.
Dividends per share
Return on equity
Book value per share
2021 value per share
Average price multiple
Forecasted growth rate
$ 2.04
9.50%
$ 17.05
Earnings
$ 5.00
13.10
13.48%
Cash Flow
$ 6.60
9.42
11.41%
Sales
$ 25.65
2.36
7.34%
The sustainable growth rate is 5.624 percent, and the required return is 12.55 percent. Use the clean surplus relationship to calculate
the share price for Beagle Beauties with the residual income model.
Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
Share price
Chapter 15 Solutions
Foundations of Financial Management
Ch. 15 - Prob. 1DQCh. 15 - Prob. 2DQCh. 15 - Prob. 3DQCh. 15 - Prob. 4DQCh. 15 - Prob. 5DQCh. 15 - Prob. 6DQCh. 15 - Prob. 7DQCh. 15 - Prob. 8DQCh. 15 - Prob. 9DQCh. 15 - Prob. 10DQ
Ch. 15 - What is privatization? (LO15-5)Ch. 15 - Louisiana Timber Company currently has 5 million...Ch. 15 - The Hamilton Corporation Company has 4 million...Ch. 15 - American Health Systems currently has 6,400,000...Ch. 15 - Using the information in Problem 3, assume that...Ch. 15 - Jordan Broadcasting Company is going public at 50...Ch. 15 - Prob. 6PCh. 15 - Tiger Golf Supplies has 25 million in earnings...Ch. 15 - Prob. 8PCh. 15 - Walton and Company is the managing investment...Ch. 15 - Prob. 10PCh. 15 - Prob. 11PCh. 15 - Prob. 12PCh. 15 - Prob. 13PCh. 15 - Prob. 14PCh. 15 - Prob. 15PCh. 15 - Prob. 16PCh. 15 - Prob. 17PCh. 15 - Midland Corporation has a net income of 19...Ch. 15 - Prob. 19PCh. 15 - Prob. 20PCh. 15 - Prob. 21PCh. 15 - Prob. 22P
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