Question: You are trying to estimate a price per share on an initial public offering 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. While 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 initial public offering.
b. What subjective adjustments would you make to the price/book value ratio for this firm and why?