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The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for

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

Stock price........ $ 76

Number of shares...... 40,000

Total assets.......$7,500,000

Total liabilities.......$3,100,000

Net income...... $ 850,000


MHMM is considering an investment that has the same PE ratio as the fi rm. 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 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?

Corporation
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Fundamentals of corporate finance

Fundamentals of corporate finance

ISBN: 978-0078034633

10th edition

Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan

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NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.

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