Start-Up Industries is a new firm that has raised $300 million by selling shares

Question

Start-Up Industries is a new firm that has raised $300 million by selling shares of stock. Management plans to earn a 18% rate of return on equity, which is more than the 12% rate of return available on comparable-risk investments. Half of all earnings will be reinvested in the firm.

What will be Start-Up

Start-Up Industries is a new firm that has raised $300 million by selling shares of stock. Management plans to earn a 18% rate of return on equity, which is more than the 12% rate of return available on comparable-risk investments. Half of all earnings will be reinvested in the firm.

Explanation / Answer

Dividend = 150 million * 12%

=18 million

a.Walter model = D+r/e(E-D/k

= 18+0.12/0.18(132)/0.18

Market value =588.89 million

b. 8% rate on investement(150*8%)

=12+0.08/0.18(138)/0.18

Market value =407.40

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