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AFM273 Midterm: Important+concepts+for+midterm

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coralgerbil169
9 Dec 2015
School
University of Waterloo
Department
Accounting & Financial Management
Course
AFM273
Professor
Xuyang Ma

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Document Summary

The balance sheet identity: net working capital = current assets current liabilities. Book value of assets book value of liabilities: could possibly be negative. Market price per share * number of shares outstanding: cannot be negative. The net present value (npv) of a project or investment is the difference between the present value of its benefits and the present value of its costs. The npv decision rule: when making an investment decision, take the alternative with the highest npv. Choosing this alternative is equivalent to receiving its npv in cash today: accepting or rejecting a project, accept those projects with positive npv, reject those projects with negative npv. Npv and the individual"s consumption preferences: separation of the. Law of one price: if equivalent investment opportunities trade simultaneously in different competitive markets, then they must trade for the same price in both markets. In a normal market, the npv of buying or selling a security is zero.

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Related Questions

I ONLY NEED THE SOLUTION TO THE NPV

The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here:
Stock price $ 73
Number of shares 40,000
Total assets $ 7,600,000
Total liabilities $ 2,200,000
Net income $ 440,000

MHMM is considering an investment that has the same PE ratio as the firm. 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 MHMMҀ™s current ROE.

What is the current book value per share? The new book value per share? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Current book value $ per share
New book value $ per share

What is the current market-to-book ratio? The new market-to-book ratio? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.)
Current market-to-book
New market-to-book

What is the current EPS? The new EPS? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Current earnings per share $
New earnings per share $

What is the NPV of this investment? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole dollar amount, e.g., 32.)
NPV $

The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here:
Stock price $ 73
Number of shares 40,000
Total assets $ 7,600,000
Total liabilities $ 2,200,000
Net income $ 440,000

MHMM is considering an investment that has the same PE ratio as the firm. 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 MHMMҀ™s current ROE.

What is the current book value per share? The new book value per share? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Current book value $ per share
New book value $ per share

What is the current market-to-book ratio? The new market-to-book ratio? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.)
Current market-to-book
New market-to-book

What is the current EPS? The new EPS? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Current earnings per share $
New earnings per share $

What is the NPV of this investment? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole dollar amount, e.g., 32.)
NPV $

Does accounting dilution occur here?
Yes
No
Does market value dilution occur here?
Yes
No

The Hagerman Heavy Metal Mining (H2M2) Corporation wants to diversify its operations. Some recent financial information for the company is shown here:

Stock price $ 90
Number of shares 25,000
Total assets $ 7,700,000
Total liabilities $ 3,700,000
Net income $ 640,000

H2M2 is considering an investment that has the same P/E ratio as the firm. The cost of the investment is $700,000, and it will be financed with a new equity issue. The return on the investment will equal H2M2Ҁ™s current ROE.

What will happen to the book value per share? (Do not round intermediate calculations. Round the final answers to 2 decimal places.)
Current book value $ per share
New book value $ per share

What will happen to the market-to-book ratio? (Do not round intermediate calculations. Round the fianl answers to 3 decimal places.)
Current market-to-book
New market-to-book

What will happen to the EPS? (Do not round intermediate calculations. Round the final answers to 2 decimal places.)
Current earnings per share $
New earnings per share $

What is the NPV of this investment? (Negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round the final answer to the nearest whole dollar.)
NPV $

Does accounting dilution occur here?
Yes
No
Does market value dilution occur here?
No
Yes