Question

The Mann Company belongs to a risk class for which the appropriate discount rate is 13 percent. Mann currently has 223,000 outstanding shares selling at $116 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.)

  

Price of the stock

$

  

b.	What will be the price of the stock at the end of the year if the dividend is not declared? (Do not round intermediate calculations.)

  

Price of the stock

$

  

c.

If Mann makes $4.8 million of new investments at the beginning of the period, earns net income of $2.2 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.)

  

Number of shares

Answer 1

Answer to Part a.

If Dividend is declared, the price of the stock on the ex-dividend date will be reduced by the amount of Dividend.

Price of Stock on Ex-Dividend Date = $116 - $3
Price of Stock on Ex-Dividend Date = $113

Answer to Part b.

If Dividend is not declared, the price of the stock will remain same i.e. $116.

Answer to Part c.

Funds Needed = $4,800,000
Share Price per Share = $116

Number of stocks to be issued to meet the Financing Needs = 4,800,000 / 116
Number of stocks to be issued to meet the Financing Needs = 41,379 shares