Book value ratio for comparable firms

Reference no: EM13963245

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 percent a year for the next five years. You have data on other companies in the environment waste disposal business:

Company	Price	BV/Share	EPS	DPS	Beta	Exp. Growth
Air & Water	$9.60	$8.48	$0.40	$0.00	1.65	10.5%
Allwaste	$5.40	$3.10	$0.25	$0.00	1.10	18.5%
Browning Ferris	$29.00	$11.50	$1.45	$0.68	1.25	11.0%
Chemical Waste	$9.40	$3.75	$0.45	$0.15	1.15	2.5%
Groundwater	$15.00	$14.45	$0.65	$0.00	1.00	3.0%
Intn'l Tech.	$3.30	$3.35	$0.16	$0.00	1.10	11.0%
Ionics	$48.00	$31.00	$2.20	$0.00	1.00	14.5%
Laidlaw	$6.30	$5.85	$0.40	$0.12	1.15	8.5%
OHM	$16.00	$5.65	$0.60	$0.00	1.15	9.50%
Rollins	$5.10	$3.65	$0.05	$0.00	1.30	1.0%
Safety-Kleen	$14.00	$9.25	$0.80	$0.36	1.15	6.50%

The average debt/equity ratio of these firms is 20 percent, and the tax rate is 40 percent.

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?

Reference no: EM13963245

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