The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its opera
ID: 2651088 • 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)doesdoes not occur in this case. Market value dilution (Click to select)doesdoes not occur in this case.
I have the answer for the ROE, I only need the answer for NPV.
ROE is 44.18.
The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here:
Explanation / Answer
Answer
Net present value is present value of cash inflow minus present value of cash outflow of particular project.
Figures in $
Particulars
Amount
Market price of stock
a
70
Net income
b
770000
Number of shares
c
25000
Earnings per share (b/c)
d
30.8
Return on equity (d/a)
e
0.44
Cost of investment
f
700000
Return on investment (e*f)
g
308000
We wanted the price after the offering to be $70 per share (assuming the PE ratio remains constant). So total share issued will be ($ 700,000/ $70) 10,000 equity shares.
Now here market value dilution does not occur. So market value of investment will be $ 700,000 (10,000 equity shares will be at Rs. 70 per share).
NPV = Market value of investment - Cost of investment
= $700,000 - $ 700,000
= NIL
Answer : Net present value of investment is NIL.
Figures in $
Particulars
Amount
Market price of stock
a
70
Net income
b
770000
Number of shares
c
25000
Earnings per share (b/c)
d
30.8
Return on equity (d/a)
e
0.44
Cost of investment
f
700000
Return on investment (e*f)
g
308000