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 15 percentdiscount below the P/E ratio on the Standard & Poor’s 500 StockIndex. Assume that the index currently has a P/E ratio of 15. Thefirm can 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 yearsIncreased earnings 3 out of 5 years Debt to total assets 25% 40%Turnover of product Slightly below average Average Quality ofmanagement High Average Assume, in assessing the initial P/E ratio,the investment banker will first determine the appropriate industryP/E based on the Standard & Poor’s 500 Index. Then a 0.50 pointwill be added to the P/E ratio for each case in which RichmondRent-A-Car is superior to the industry norm, and a 0.50 point willbe deducted for an inferior comparison. On this basis, what shouldthe initial P/E be for the firm? (Round your answer to 1 decimalplace.)
