Question

The Harpe Company currently has 225,000 outstanding shares selling at $120 each. The firm is contemplating the declaration of a dividend of $3 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 the company makes $5 million of new investments at the beginning of the period, earns net income of $2.4 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

Since Interest rate is not given we will ignor time alue of money

a) As per MM approach Po=P1+D1/1+Ke

120 = P1+3

P1=120*3

=117

b) if dividend is not declared

Po=P1+D1

120=P1+0

P1=120

C) statement showing no of shares to be issued

Particulars	If dividend is declared	If dividend is not declared
Net income(in mln)	2.4	2.4
Less: dividend( in mln)	0.675	0
Retain earnings( in mln)	1.725	2.4
Investment budget(in mln)	5	5
Funds required(in mln)	3.275	2.6
Market price per share	117	120
No of shares required(Fund required/MPS)	27991.45	21666.67