Richmond Rent-A-Car is about to go public. The investment banking firm of Tinkers, Evers & Chance...

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Richmond Rent-A-Car is about to go public. The investmentbanking firm of Tinkers, Evers & Chance is attempting to pricethe issue. The car rental industry generally trades at a 25 percentdiscount below the P/E ratio on the Standard & Poor’s 500 StockIndex. Assume that index currently has a P/E ratio of 25. The firmcan be compared to the car rental industry as follows:

Richmond Car Rental Industry
Growth rate in earnings per share 12% 10%
Consistency of performance Increased earnings
4 out of 5 years Increased earnings
3 out of 5 years
Debt to total assets 36% 40%
Turnover of product Slightly below average Average
Quality of management High Average

Assume, in assessing the initial P/E ratio, the investmentbanker will first determine the appropriate industry P/E based onthe Standard & Poor’s 500 Index. Then a .50 point will be addedto the P/E ratio for each case in which Richmond Rent-A-Car issuperior to the industry norm, and a .50 point will be deducted foran inferior comparison.

On this basis, what should the initial P/E be for the firm?

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Richmond Rent-A-Car is about to go public. The investmentbanking firm of Tinkers, Evers & Chance is attempting to pricethe issue. The car rental industry generally trades at a 25 percentdiscount below the P/E ratio on the Standard & Poor’s 500 StockIndex. Assume that index currently has a P/E ratio of 25. The firmcan be compared to the car rental industry as follows: RichmondCar Rental IndustryGrowth rate in earnings per share12%10%Consistency of performanceIncreased earnings4 out of 5 yearsIncreased earnings3 out of 5 yearsDebt to total assets36%40%Turnover of productSlightly below averageAverageQuality of managementHighAverage Assume, in assessing the initial P/E ratio, the investmentbanker will first determine the appropriate industry P/E based onthe Standard & Poor’s 500 Index. Then a .50 point will be addedto the P/E ratio for each case in which Richmond Rent-A-Car issuperior to the industry norm, and a .50 point will be deducted foran inferior comparison. On this basis, what should the initial P/E be for the firm?

	Richmond	Car Rental Industry
Growth rate in earnings per share	12%	10%
Consistency of performance	Increased earnings 4 out of 5 years	Increased earnings 3 out of 5 years
Debt to total assets	36%	40%
Turnover of product	Slightly below average	Average
Quality of management	High	Average