Question

The Mann Company belongs to a risk class for which the appropriate discount rate is 13

percent. The company currently has 233,000 outstanding shares selling at $136 each.
The firm is contemplating the declaration of a $3 dividend at the end of the fiscal year
that just began. Assume there are no taxes on dividends, Answer the following questions
based on the Miller and Modigliani model, which is discussed in the text.
a. What will be the price of the stock on the ex-dividend date if the dividend is declared?
(Do not round intermediate calculations.)
b. What will be the price pf the stock at the end of the year if the dividend is not
declared? (Do not round intermediate calculations.)
c. If the company makes $5.8 million of new investments at the beginning of the period,
earns net income of $3.2 million, and pays the dividend at the end of the year, how
many shares of new stock must the firm issue to meet its funding needs? (Do not
round intermediate calculations and round your answer to the nearest whole
number, e.g., 32.)

Answer 1

a. The price of the stock on the ex-dividend date will be $133 per share. b. The price of the stock at the end of the year will be $136 per share. c. The firm does not need to issue any new shares of stock.

Step-by-step explanation:

a. According to the Miller and Modigliani model, the price of the stock on the ex-dividend date will decrease by the amount of the dividend. In this case, the dividend is $3, so the price of the stock on the ex-dividend date will be $136 - $3 = $133 per share.

b. If the dividend is not declared, the price of the stock at the end of the year will remain the same as the current price. Therefore, the price of the stock at the end of the year will be $136 per share.

c. To determine the number of shares of new stock the firm must issue to meet its funding needs, we need to calculate the funding shortfall, which is the difference between the new investments and the net income minus the dividend. In this case, the funding shortfall is $5.8 million - $3.2 million - $3 million = $-0.4 million. Since the firm has a negative funding shortfall, it does not need to issue any new shares of stock.