Question

Start-Up Industries is a new firm that has raised $400 million by selling shares of stock. Management plans to earn a rate of return on equity of 20%, which is more than the 12% 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? (Do not round intermediate calculations.) 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 8% on its investments? (Do not round intermediate calculations. Round your answer to 1 decimal place.)

Answer 1

ROExRetention ratio | | a) Growth rate 2 Market value 10.0%)-20% *50% 2,000-00*20%*50%/(12%-10%) /(kt $ 3 Market-to-book ratio Market value/Book value 5.00-2000/400 4 5 b) Growth rate 6 Market value | 5.0%|-10%,50% 286 1400*10%*50%/(12%-5%) ROExRetention ratio $ 7 Market-to-book ratio Market value/Book value 0.72-286/400