Question

The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here:

Stock price	$	81
Number of shares		20,000
Total assets	$	6,400,000
Total liabilities	$	4,000,000
Net income	$	760,000

MHMM is considering an investment that has the same PE ratio as the firm. The cost of the investment is $600,000, 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.)

Current book value	$  per share
New book value	$  per share

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.)

Current market-to-book
New market-to-book

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.)

Current earnings per share	$
New earnings per share	$

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.)

NPV

$

Answer 1

1	Current book value per share	(Assets-Liabilities)/Outstanding Shares
		(6400000-4000000)/20000
		240000/20000
		$120 per share
	New Book Value per share	(Assets-Liabilities)/Outstanding Shares
		(6400000-4000000+600000)/20000
		3000000/20000
		$150 per share
2	Current Market to Book Value	Stock Price/Book Value per share
		81/120
		0.675
	New Market to Book Value	Stock Price/Book Value per share
		81/150
		0.54
3	Current earnings per share	Net Income /OS shares
		760000/20000 shares
		$38 per share
	New Shares issued	600000/81
		7407
	New Total Income
	ROE	NI/Equity
		760000/(6400000-4000000)
		760000/2400000
		0.32
	Since ROE equals ROI
	New Total Equity	4000000+600000
		4600000
	New Net Income	4600000*.32
		1472000
	Current EPS	New Net Income /OS shares
		1472000/(20000+7407)
		$53.71 per share
3	What is the NPV of this investment?
	NPV			WN
	Cost of Project	600000		New Market Value	P/E ratio *New EPS
	Add new Market Value	(114.4*27407)			2.13*$53.71	$114.40
	Less current Market Value	(81*20000)		P/E Ratio	Stock Price/EPS
		2115360.8			81/38
					2.13