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?