MHM Wants to Diversify Its Operations

question 22

Multiple Choice

MHM wants to diversify its operations. The stock price is $22 a share with 225,000 shares outstanding. Total assets are $7.2 million, total liabilities are $3.8 million, and net income is $425,000. The company is considering an investment that has the same PE ratio as the current company. The cost of the investment is $360,000 which will be financed with a new equity issue. What would the ROE on the investment have to be if we wanted the stock price to remain constant?

• A) 9.28 percent
• B) 11.41 percent
• C) 7.63 percent
• D) 8.59 percent
• E) 10.03 percent

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