FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Problem 7-26 Valuing Businesses (LO3)
Start-Up Industries is a new firm that has raised $360 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?
Note: Do not round intermediate calculations.
Market-to-book ratio
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 5% on its investments?
Note: Do not round intermediate calculations. Round your answer to 1 decimal place.
Market-to-book ratio
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Transcribed Image Text:Problem 7-26 Valuing Businesses (LO3) Start-Up Industries is a new firm that has raised $360 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? Note: Do not round intermediate calculations. Market-to-book ratio 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 5% on its investments? Note: Do not round intermediate calculations. Round your answer to 1 decimal place. Market-to-book ratio
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