The Company belongs to a risk class for which the appropriate discount rate is 11 percent....
The Company belongs to a risk class for which the appropriate
discount rate is 11 percent. Company currently has 235,000
outstanding shares selling at $441 each. The firm is contemplating
the declaration of a $10 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.
a. What will be the price of the stock on the ex-dividend date if
the dividend is declared?
b. What will be the price of the stock at the end of the year if
the dividend is not declared?
c. If company makes $4.25 million of new investments today, earns net income of $2.1 million, and pays the dividend at the end of the year, how many shares of new stock must the firm issue to meet today's funding needs?
Shows all the step and formula. Don't round off until you get the
answer.
Homework Answers
a). If the dividend is declared, the price of the stock will drop on the ex-dividend date by the value of the dividend, $10. It will then trade for $431(= $441 - $10).
b). If dividend is not declared, the price will remain at $441.
c). No. of shares = Amount needed / Current Market Price
= $4,250,000 / $441 = 9,637.19, or 9,638 shares
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