Only looking for parts a and b. The ROE on the investment would have to be __% i

Question

Only looking for parts a and b. The ROE on the investment would have to be __% if we wanted the price after the offering to be $64 per share. Assume PE ratio remains constant, and the NPV of the investment would be $__.
The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here: Stock price $ Number of shares Total assets $8,200,000 Total liabilities $4, 000, 000 Net income S 700,000 64 40,000 The company is considering an investment that has the same PE ratio as the firm. The cost of the investment is and t will be financed with a new equty issue. (Do not round intermediate calculations.) The ROE on the investment would have to be decimal places, e.g. 32.16.) If we wanted the price after the offering to be $64 per share (assume the PE ratio remains constant), and the NPV of the investment would be $ occur in this case percent (Enter your answer as a percent rounded to2 (Leave no cells blank - be certain to enter "O" wherever required.) Accounting dilution Des ccur In this case. Market value dilution

Explanation / Answer

Soln : P/E ratio of MHMM = 64/(700000/40000) =3.66

Let x be the no. of shares issued (new) for investment, Price of the share = 800000/x

P/E is same for this investment, let y be the earning on this new investment

So. (800000/x)/(y/x) = 3.66 or 800000/y = 3.66 , y = 218750

Hence earning on 800000 investment or ROE for the investment = 218750/800000 = 27.34%

NPV of the investment = -800000 + 218750/1.2734 = -628220

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