The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its opera
ID: 2651006 • Letter: T
Question
The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here:
MHMM is considering an investment that has the same PE ratio as the firm. The cost of the investment is $700,000, and it will be financed with a new equity issue. (Do not round intermediate calculations.)
The ROE on the investment would have to be percent --------?(Round your answer to 2 decimal places (e.g., 32.16).) if we wanted the price after the offering to be $70 per share (assume the PE ratio remains constant), and the NPV of the investment would be $ --------? (Leave no cells blank - be certain to enter "0" wherever required.). Accounting dilution (Click to select)does notdoes occur in this case. Market value dilution (Click to select)doesdoes not occur in this case.
The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here:
Explanation / Answer
Calculation of current PE ratio = MPS / Earning per share
Earning per share = Earnings available for equity shareholders/ Number of equity shares outstanding
= 770000/25000 i.e 30.80
Market price per share = 70
Price earning ratio = 70/30.80 i.e 2.27
Number of shares outstanding after new issue = 25000+700000/70 i.e 35000
Calculation of earnings required to maintain same PE ratio
2.27=70/ 770000+X/35000
2.27=70*35000/770000+X
2.27(770000+X) = 2450000
1747900+2.27X= 2450000
2.27X = 702100
X = 309295
Return on equity = 309295/700000 i.e 44.18%