The Mann Company belongs to a risk class for which the appropriate discount rate

Question

The Mann Company belongs to a risk class for which the appropriate discount rate is 11 percent. Mann currently has 231,000 outstanding shares selling at $132 each. The firm is contemplating the declaration of a $3 dividend 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 Mann makes $5.6 million of new investments at the beginning of the period, earns net income of $3.0 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

Explanation / Answer

a) By declaring the dividend, the price of the stock wll fall by the price of the dividend on the ex-dividend date.
Therefore, the price of the stock : $132-$3 = $129

b) The price of the stock if dividend is not declared will remain constant at $132

c) Amount of dividend : $4 * 231,000 shares = $924000
Net income = $3,000,000
For the purpose of funding, the remaining funds out of left over net income after paying dividend is not sufficient.
So, Mann company should finance by selling his shares.
No. of shares to be issued of new stock to meet its funding needs = $56,00,000 / $132 = 42,424 shares

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