Problem:
The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown below:
Stock price = $75
Number of shares = 65,000
Total Assets = $9,400,000
Total liabilities = $4,100,000
Net income = $980,000
MHMM is considering an investment that has the same PE ratio as the firm. The cost of the investment is $1,500,000, and it will be financed with a new equity issue. The return on the investment will equal MHMM's current ROE.
Q1. What will happen to the book value per share, the market value per share, and the EPS?
Q2. What is the NPV of this investment?
Q3. Does dilution take place?
Q4. What will be the ROE on the investment have to be if we wanted the price after the offering to be $75 per share? (Assume the PE ration remains constant.)
Q5. What is the NPV of this investment?