In: Finance
The Metallica Heavy Metal Mining (MHMM) Corporation wants to
diversify its operations. Some recent financial information for the
company is shown here:
Stock price | $ | 69 | |
Number of shares | 30,000 | ||
Total assets | $ | 8,700,000 | |
Total liabilities | $ | 3,600,000 | |
Net income | $ | 600,000 | |
The company is considering an investment that has the same PE ratio
as the firm. The cost of the investment is $640,000, and it will be
financed with a new equity issue. The return on the investment will
equal the company's current ROE.
What is the current book value per share and the book value per
share with the investment? (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 and the market-to-book ratio with the investment? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.)
What is the current EPS and the EPS with the investment? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
What is the NPV of this investment? (A negative answer 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.)
Does accounting dilution occur
here?
Yes
No
Does market value dilution occur here?
No
Yes
Hello
1) Current Return on Equity (ROE) :
2) New net Income
3) Compute the current EPS = $600,000/$30,000 = $20
4) Number of shares to be issued to finance new investment = $640,000/$69 9,276 shares
5) EPS after issue of new equity shares = $675,024/(30000+9276) = $17.19 per share
6) Current Price to Earning Ratio = P/E0 = $69/$20 = 3.45
7) Price of share after issue of new issue, P1 = 3.45 * 17.19 = $59.31
8) Current Book Value per Share = Total Equity/ Total Shares = (8,700,000-3,600,000)/30,000 = $170
9) Book Value per Share after issue of New Equity = Total Equity/ Total Shares = (8,700,000-3,600,000+675,024)/(30,000+9276) = $175.13
Market Price fell after Investment. Hence, Market Dilution took Place.
Book Value of Share increased after investment. Hence, Accounting Dilution didn't took place.
I hope this solves your doubt.
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