Problem 16-10 Dividends and Stock Price
The Harpe Company
currently has 238,000 outstanding shares selling at $146 each. The
firm is contemplating the declaration of a dividend of $4 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 $6.3 million of new
investments at the beginning of the period, earns net income of
$3.7 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
| MM Theory says that dividend does not have repercussions on the price of the stock | |||||||||
| a) | On the Ex-dividend date, the price of the share would decrease by dividend per share | ||||||||
| So new share price | 142.00 | ||||||||
| b) | If dividend is not declared, the price of the stock would remain same | ||||||||
| Share price | 146.00 | ||||||||
| c) | Old number of shares | 238000 | |||||||
| Additional share issued | N | ||||||||
| Dividend | 4 | ||||||||
| Share price | 146 | ||||||||
| So, | N*146+3700000-6300000=(N+238000)*4 | ||||||||
| N = | 25014.08 | ~ | 25014 | ||||||
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