Question

Problem 15-11 Dilution [LO3]

(3.)

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

Stock price $ 56 Number of 20,000 shares Total assets $6,200,000 Total liabilities $3,000,000 Net income $ 410,000 MHMM is considering an investment that has the same PE ratio as the firm. The cost of the investment is $700,000, and it will be financed with a new equity issue. percent if we wanted the price after The ROE on the investment would have to be (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) the offering to be $56 per share (assume the PE ratio remains constant), and the NPV of the investment would be (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations.) occur in this case. Market value dilution occur in this case. - Accounting dilution does not does

Answer 1

Here is solution of your question. All the best

NI ROED. NIO TEO 410,000 3,200,000 0.128, Q.12.2017 (ROE) (TEy), 0.1281 (3,200,000 + 700,000). _2 0.128173.900,000) 2$ 499,890. 2 _Eps de 410000/20000 shares - 20,5$ neay shares 700000|56 : 12.500 OPIE)o, 56/20.5 = 2.73. Epsil. 499590 20000 + 12500 (newcharel) z 15.312.- | Pie 2:73415.372: 41.96% Plt) 1 = 41.96) 15.372 = 2.73. Calablau book rabd wet prevent value. NPV = -700,000 + [ 41.96/32500)-56, - 100,000 † [1363,700- - 1120000] 2 - 456,300 $ NPV 2 -4456, 306 . TO TA Accounting Dilution & Market Bilution calwlate Book Value ! BUPŠO, TEOlharese, 3,200,000 | 20000 = 160$ perche BVPS - TEDI share ? (3200,000 + 100,000) | 32500 - - 2 1208 pershat. Market to Book o .= Marke to Book $8 56/160 41096/120 0.35 0.35 2 1) Accountise dilution doll occur in this cave as market to - book value is les than one as 0.35 25 Market value Dilution does occur in this care a NPV is negative in this care