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 13 percent. Mann currently has 223,000 outstanding shares selling at $116 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.

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 $4.8 million of new investments at the beginning of the period, earns net income of $2.2 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 13 percent. Mann currently has 223,000 outstanding shares selling at $116 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.

Explanation / Answer

Mann Company a.What will be the price of the stock on the ex-dividend date if the dividend is declared? If the dividend is declared, the price of the stock will drop on the ex-dividend date by the value of the dividend, $3. It will then trade for $113. b.What will be the price of the stock at the end of the year if the dividend is not declared? If dividend is not declared, the price will remain at $116 c.If Mann makes $4.8 million of new investments at the beginning of the period, earns net income of $2.2 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? Mann’s outflows for investments are $4,800,000. These outflows occur immediately. One year from now, the firm will realize $2,200,000 in net income and it will pay $669,000 in dividends, but the need for financing is immediate. Mann must finance $4,800,000 through the sale of shares worth $116. It must sell $4,800,000 / $116 = 41,379 shares.

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