FILL IN THE FOUR BLANKS PLEASE. The Metallica Heavy Metal Mining (MHMM) Corporat
ID: 2767579 • Letter: F
Question
FILL IN THE FOUR BLANKS PLEASE.
The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here:
MHMM is considering an investment that has the same PE ratio as the firm. The cost of the investment is $800,000, 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.)
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.)
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.)
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.)
The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here:
Explanation / Answer
Stock price = 73
Number of shares 40,000
Total assests 76,00,000
Total liability 22,00,000
Part A - Calculation of book value
Current book value = Total assests - Total liability / Number of outstanding shares
= 76,00,000-22,00,000 / 40,000
= 135 per share
New book value = Total assets + New investment - Total Liability / Number of outstanding shares + New shares
= 76,00,000 + 8,00,000 - 22,00,000 / 40,000+ 10.958 (8,00,000/73)
= 62,00,000 / 50,958
= 121.66
Part C - EPS calculation
Current EPS ratio = Net Income / Number of shares
= 4,40,000 / 40,000
= 11 per share
New EPS ratio = Net income / Existing shares + Newly issued shares
= 4,40,000 / 40,000 + 10,958
= 8.63 per share
Part B - Current market to book ratio
Current P/E ratio = Market price / earning per share
= 73 / 11 (4,40,000/40,000)
= 6.63
New P/E ratio = 6.63 ( Same as current P/E ratio as given in question)
New market price share = New EPS * P/E ratio
= 8.63 * 6.63
= 57.21
Current market to book ratio = Current market price / Book price per share
= 73 / 135
= 0.54
New Current market to book ratio = New current market price / Book price per share
= 57.21 / 121.66
= 0.47
Part D Caluculation of NPV of project
Return on investment = Net return / Capital employed * 100
= 4,40,000 / 54,00,000 * 100
= 8.14%
NPV of the project = 8,00,000 * 8.14%
= 65,120
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