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%
Plowback ratio........ 50.00%
Rate on equity (b) .... 10.00%

  • CreatedSeptember 19, 2013
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