How do you find the ROE on the investment and the NPV on the investment? The Met

Question

How do you find the ROE on the investment and the NPV on the investment?

The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here; Stock price $ 60 Number of shares 20,000 Total assets $ 8,400,000 Total liabilities $ 3,900,000 Net income $ 870,000 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 ROE on the investment would have to be percent (Round your answer to 2 decimal places. (e.g., 32.16)) if we wanted the price after the offering to be $60 per share (assume the PE ratio still remains constant), and the NPV of the investment would be S (Leave no cells blank - be certain to enter ?Or? wherever required.). Accounting dilution does occur in this case. Market value dilution does not 9 occur in this case.

Explanation / Answer

ROE = Net income / Total equity * 100%

= $870,000 / ($8,400,000 - $3,900,000) * 100%

= 19.33%

NPV = - Investment + Net income / ROE

= - $600,000 + $870,000 / 19.33%

= $3,900,000

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