Question

15-10 Dilution [LO3] he 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 hares Total assets $9,400,000 Total liabilities $4,100,000 Net income 980,000 75 64,000 MHMM is considering an investment that has the same PE ratio as the firm. The cost 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. a. 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.) b. What is the current market-to-book ratio? The new market-to-book ratio? (Do not c. What is the current EPS? The new EPS? (Do not round intermediate calculations and d. What is the NPV of this investment? (A negative answer should be indicated by a round intermediate calculations and round your answers to 4 decimal places, e.g 1616.) round your answers to 2 decimal places, e.g., 32.16.) minus sign. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) a. Current book value New book value b. Current market-to-book New market-to-book c. Current earnings per share New earnings per share < Prev 7or 7Hİ Next>

Answer 1

Current Book Value = Share holders Equity/No OF SAHRES OUTSTANDING

Shereholders Equity = Asset - liabilities = $5300000

= 5300000/64000 = $82.81 per share

New Book Value

The number of shares the company will offer is the cost of the investment divided by current shareprice

The number of new shares = $1500000/$75

= 20000 shares

New book value = $5300000 + $1500000 / 64000+20000

= $80.99 per share

The current market to book =

Current shareprice/current book value = $75/$81.81 = 0.91

The new market to book = New stockprice/new book value

New stock price =

The p/e remains constant

P/e = Market price/ EPS

Number of shares = 64000

Stock price = $75

Market capitalization = 64000 * 75 = $4800000

Current EPS of MHMM = Net Income/ No of shares

= 980000/64000 = 15.31

P/E Ratio = $75/15.31 = 4.90

The earnings per share after the stock offer will be

The current ROE = Net income/ Equity

980000/5300000 = .18 = 18%

The new net income will be

.18(5300000+1500000)

= $1224000

New EPS ater stock offer = 1224000/84000

= 14.57

The new stock price will be

= current p/e* eps

=4.90(14.57) = $71.39

new market to book = $71.39/80.99 = 0.88

The NPV of the project

The NPV of the project is the cost of project plus the new market value of the firm minus the current market value of the firm

= -$1500000{$71.39(84000)-$75(20000)}

NPV=2996760