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 14 percent. Mann currently has 224,000 outstanding shares selling at $118 each. The firm is contemplating the declaration of a $4 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.

What will be the price of the stock on the ex-dividend date if the dividend is declared? (Do not round intermediate calculations.)

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.)

If Mann makes $4.9 million of new investments at the beginning of the period, earns net income of $2.3 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.)

The Mann Company belongs to a risk class for which the appropriate discount rate is 14 percent. Mann currently has 224,000 outstanding shares selling at $118 each. The firm is contemplating the declaration of a $4 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.

Explanation / Answer

a)

If dividend is declared, the price of stock on the ex-dividend date will drop by the value of dividend

price = 118 - 4 = 114

b)

if dividend is not declared price will remain same

price = 118

c)

outflow occur immediately but the income is realized after an year , hence it should sell shares to cover investment amount

number of shares = 4900000/118 = 41525 shares

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