MHM Wants to Diversify Its Operations

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