The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its opera
ID: 2818563 • 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 $640,000, and it will be financed with a new equity issue. The return on the investment will equal MHMM’s current ROE.
What is the current book value per share? The new book value per share? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
What is the current market-to-book ratio? The new market-to-book ratio? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.)
What is the current EPS? The new EPS? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
What is the NPV of this investment? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole dollar amount, e.g., 32.)
Does accounting dilution occur here?
The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here:
Explanation / Answer
Book Value per share = Equity/Shares Equity = Total Assets - Total liabilities Current Book Value per share = (8700000-3600000)/30000 $170 New book Value per share = 5100000+640000/39275 $146.15 Current market to book 69/170 0.405882 New market to book 69/146.15 0.472118 Current earnings per share = 600000/30000 $20 per share Return on Investment = 600000/5100000 11.76% New Earnings = (5100000+640000)*11.76% 675294.1 New no of shares = 640000/69 9275.362 New Earnings per share = 675294.10/39275 17.19 NPV of the project would be cost of the project + new market value - current market value NPV 640000+(39275*69)-(30000*69) 0 NPV 0 Yes, accounting dilution is there because book value drop from $ 170 to $ 146.15 No, there is no market value dilution