Question

The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here:

Stock price	$	40
Number of shares		30,000
Total assets	$	8,000,000
Total liabilities	$	3,500,000
Net income	$	360,000

MHMM is considering an investment that has the same PE ratio as the firm. The cost of the investment is $750,000, and it will be financed with a new equity issue. The return on the investment will equal MHMM’s current ROE.

The ROE on the investment would have to be _______ percent. if we wanted the price after the offereing to be $40 per share (assume the PE ratio remains constant), and the NPV of the investment would be $_____.

Question what is the ROE on the investment?

Answer 1

Total assets = 8,000,000

Total liabilities = 3,500,000

Hence, Equity = Total assets - total liabilities

                      = 8,000,000 - 3,500,000

                      = 4,500,000

Net Income = 360,000

Therefore, ROE = Net Income / Total Equity

                        = 360,000 / 4,500,000

                        = 0.08 or 8%

Since, Return on investment is equal to current ROE

Therefore, Return on investment = 8%