You are trying to estimate a price per share on an IPO of a company involved in environmental waste disposal.
The company has a book value per share of $20 and earned $3.50 per share in the most recent time period.
Although it does not pay dividends, the capital expenditures per share were $2.50 higher than depreciation per share in the most recent period, and the firm uses no debt financing. Analysts project that earnings for the company will grow 25% a year for the next five years.
You have data on other companies in the environment waste disposal business:

The average debt/equity ratio of these firms is 20%, and the tax rate is 40%.
a. Estimate the average price/book value ratio for these comparable firms. Would you use this average P/BV ratio to price the IPO?
b. What subjective adjustments would you make to the price/book value ratio for this firm and why?

Transcribed Image Text:

Expected Growth BVI Price Share EPS DPS Company ($) ($) ($) ($) Beta (%) Air & Water 9.60 8.48 0.40 0.00 1.65 10.5 5.40 3.10 0.25 0.00 1.10 18.5 29.00 11.50 145 0.68 1.25 11.0 Allwaste Browning Ferris Chemical Waste 9.40 3.75 0.45 0.15 1.15 2.5 3.0 Intn'l Tech 3.30 3.35 0.16 0.00 11 11.0 48.00 31.00 2.20 0.00 1.00 14.5 8.5 Groundwater 15,00 14.45 0.65 0.00 1.00 Ionics Laidlaw OHM Rollins Safety-Kleen 14.00 9.25 0.80 0.36 1.15 6.50 6.30 5.85 0.40 0.12 1.15 16.00 5.65 0.60 0.00 115 5.10 3.65 0.05 0.00 1.30 9.50 1.0