The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its opera
ID: 2711807 • 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 $750,000, and it will be financed with a new equity issue. The return on the investment will equal MHMM’s current ROE.
What will happen to the book value per share? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
What will happen to the market-to-book ratio? (Do not round intermediate calculations and round your final answers to 4 decimal places. (e.g., 32.1616))
What will happen to the EPS? (Do not round intermediate calculations and round your final 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 final answer to the nearest whole dollar amount.)
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
Calculation of current book value:
Equity = Total Assets - Total Liabilities
Equity = 8,600,000 - 4,400,000 = $4,200,000
Number of Shares = 30,000
Book Value per Share = 4,200,000 / 30,000 = $140
New Book Value = New Equity = 4,200,000 + 750,000 = $4,950,000
New Book Value = 4,950,000 / 30,000 = $165
Market to Book Ratio:
Current = Market Price / Book Price
Current Market to Book Ratio = 76 / 140 = 0.54
New Ratio = 76 / 165 = 0.46
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