I ONLY NEED THE SOLUTION TO THE NPV The Metallica Heavy Metal Mining (MHMM) Corp
ID: 2768320 • Letter: I
Question
I ONLY NEED THE SOLUTION TO THE NPV
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 $800,000, 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.)
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:
The NPV of the project is the cost of the project plus the new market value of the firm minus the current market value of the firm, or:
NPV = –$800,000 + [$9.92(50959) – $73(40,000)]
=-800000+(505513.28-2920000)
= $-3214486.72 or $-3214487
Accounting dilution takes place here because the market-to-book ratio is less than one. Market value dilution has occurred since the firm is investing in a negative NPV project.
Working note:
The number of shares the company will offer is the cost of the investment divided by the current share price, so: Number of new shares = $800,000/$73 =10959
The earnings per share after the stock offer will be:
EPS 1 = $505300/50959 shares = $9.92
The total equity of the company is total assets minus total liabilities, or:
Equity = $7,600,000 – 2,200,000
Equity =$5400,000
So, the current ROE of the company is:
ROE 0 = NI 0 /TE 0 = $440,000 / $5400000 =8.15%
The new net income will be the ROE times the new total equity, or:
NI 1 = (ROE 0 )(TE 1 ) =8.15%($5400000 + 800,000) = $505300
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