Start-Up Industries is a new firm that has raised $210 million by selling shares of stock. Management plans to earn a 20% 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. What will be Start-Up?s ratio of market value to book value if the firm can earn only a rate of return of 10% on its investments?