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 P/E ratio as the firm. The cost of the investment is $798,270, and it will be financed with a new equity issue. What would the ROE on the investment have to be if we wanted the price after the offering to be $110 per share?
Assume the PE ratio remains constant.

Question

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 P/E ratio as the firm. The cost of the investment is $798,270, and it will be financed with a new equity issue. What would the ROE on the investment have to be if we wanted the price after the offering to be $110 per share?
Assume the PE ratio remains constant.

Quizplus · Accepted Answer

Current ROE = $451,000/($4,631,000 - $2,315,500) = 0.19477435New net income = 0.19477435 ($4,631,000 - $2,315,500 + $798,270) = $606,483Number of new shares = $798,270/$110 = 7,257New EPS = $606,483/(11,000 + 7,257) =$33.22Current P/E = $110/($451,000/11,000) = 2.6829Necessary EPS = $110 = 2.6829(Necessary EPS); Necessary EPS = $41Necessary net income = $41 (7,257) = $297,537New ROE = $297,537/$798,270 = 37.27 percent

The Metallica Heavy Metal Mining (MHMM) Corporation Wants to Diversify