2. 10.

Dilution [LO 15.3] The Metallica Heavy Metal Mining (MHMM)

Company 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 $1.5 million and it will be financed with a new equity issue. The return on the investment will equal MHMM’s current ROE. What will happen to the book value per share, the market value per share and the EPS? What is the NPV of this investment? Does dilution take place?

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Share price S Number of shares 64 000 75 Total assets $9 400 000 Total liabilities $4100000 Profit for the year $ 980000