Question

The Harpe Company currently has 227,000 outstanding shares selling at $124 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 $5.2 million of new investments at the beginning of the period, earns net income of $2.6 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

a.

Number of share outstanding = 227,000

Current stock price = $124

Expected dividend per share = $3

a.

Stock price of company on ex dividend date = $124 - $3

= $121

if company pays dividend, then Stock price of company on ex dividend date will be $121.

b.

if company does not pays dividend, then Stock price of company at year end will be same as current stock price that is $124.

c.

Total Financing need = $5,200,000

Number of share need to issue = $5,200,000 / $124

= 41,935

To fund the project comapny need to issue 41,935 shares.