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Richmond RentACar is about to go public The investment banking firm of Tinkers Evers and Chance is attempting to price the issue The car rental industry generally trades at 20 percent discount

Richmond Rent-A-Car is about to go public. The investment banking firm of Tinkers, Evers and Chance is attempting to price the issue. The car rental industry generally trades at 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:

Richmond Car Rental Industry

Growth rate in earnings per share 15% 10%

Consistency of Performance Increased earnings Increased earnings

4 out of 5 years 3 out of 5 years

Debt to total assets 52% 39%

Turnover of product Slightly below average Average

Quality of Management High 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 half 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 half point will be deducted for an inferior comparison. On this basis, what should be the initial P/E ratio for the firm? Show all work!

 

Aug 11 2020 View more View Less

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