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 $800,000,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 $115 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 $800,000,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 $115 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 + $800,000) = $606,819Number of new shares = $800,000/$115 = 6956.522New EPS = $606,819/(11,000 + 6,956.522) =$33.79Current P/E = $115/($451,000/11,000) = 2.804878Necessary EPS = $115 = 2.804878(Necessary EPS); Necessary EPS = $41Necessary net income = $41 (6,956.522) = $285,217New ROE = $285,217/$800,000 = 35.65 percent

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