The Metallica Heavy Metal Mining (MHMM) Corporation want to diversify its operat

Question

The Metallica Heavy Metal Mining (MHMM) Corporation want to diversify its operations. Some recent financial information for the company is shown here:
Stock Price $73
Number of shares 45,000
Total assets $6,500,000
Total Liabilities $2,600,00
Net Income $630,000
MHMM is considering an investment that has the same PE ratio as the firm. The cost of the investment is $1,100,000, and will be financed with a new equity issue. The return on investment will equal MHMM's current ROE.What will happen to the book value per share, the market value per share, and the EPS? What is the NPV of this investment? does dilution take place?

Explanation / Answer

ROE0 = NI0/TE0 = $630,000/$3,900,000 = .1615

NI1 = (ROE0)(TE1) = .1615($3,900,000 + 1,100,000) = $807,500

EPS0 = $630,000/45,000 shares = $14; number of new shares = $1,100,000/$73 = 15,068

EPS1 =$807,500/45,000 + 15,068 shares =$807,500/60,068 = $13.44

(P/E)0 = $73/$14 = 5.21

P1 = 5.21($13.44) = $70.08

(P/E)1 = $70.08/$13.44 = 5.21

BVPS0 = TE0/shares0 = $3,900,000/45,000 shares = $86.67 per share;

BVPS1 = TE1/shares1 = ($3,900,000 + 1,100,000)/60,068 shares = $83.24 per share

Market-to-book0 = $73/$86.67 = 0.84; market-to-book1 = $70.08/$83.24 = 0.84

NPV =

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