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A company is financed by 1000 shares of stock with a current market value of 100...

A company is financed by 1000 shares of stock with a current market value of 100 per share. The company decides to issue 50 5-year bonds with a par value of 100 and an annual coupon rate of 8% and use the proceeds to pay a cash dividend to the company’s shareholders. The bonds sell at a market value that provides an annual effective yield of 10%. Assuming that Modigliani-Miller Proposition I holds, what is the market value per share of the company’s stock immediately after the dividend payment?

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Answer #1

Proceeds from bond issue is 4621

Shares outstanding = 1000

Dividend per share = 4621/1000 = 46.21

As per MM approch value of the share will be reduced by amount of dividend

New market value per share 100-46.21 = 53.79

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