Start-Up Industries is a new firm that has raised $200 million by selling shares of stock. Management plans to earn a 24% rate of return on equity, which is more than the 15%rate of return available on comparable-risk investments. Half of all earnings will be reinvested in the firm.
a. What will be Start-Up's ratio of market value to book value?
b. How would that ratio change if the firm can earn only a 10% rate of return on its investments?
Amount raised......$200.00 million
Return on equity.....24.00%
Rate of return......15.00%
Plow back ratio........50.00%
Rate on equity (b) ....10.00%