Start-up Industries is a new firm, which has raised $100 million by selling shares of stock. Management expects 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?