Start-up’s ratio of market value
September 28th, 2022
Start-up Industries is a new firm that has raised $200 million by selling shares of stock. Management
plans to earn a 24 percent rate of return on equity, which is more than the 15 percent 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 percent rate of return on its investments?
c. Why do investments in financial markets almost always have zero NPVs whereas firms can almost always find many investments in their new product markets with positive NPVs?