Question

The Harpe Company currently has 233,000 outstanding shares selling at $136 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 $5.8 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.)

Number of shares            

Answer 1

Hello

(a) Price of the stock = $136 - $3 = $133

On the ex-dividend date, the market price of the share is dividend-adjusted.

(b) Price of the stock = $136

Price of the stock if dividend is not declared will be unchanged.

(c) Number of shares = 42647 shares

Investment requirement = $5.8m

Maximum Issue Price = Market Price = $136

Hence, number of shares required =

I hope this solves your doubt.

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