A newly listed firm has raised $200 million by selling shares of stock. Management expects to earn a 20 percent rate of return on equity, which is more than the 12 percent rate of return available on comparable-risk investments. Half of all earnings will be reinvested in the firm.

1. What will be the new firms ratio of market value to book value?
2. How would that ratio change if the firm can earn only a 10 percent rate of return on its investments?