Question

Please Show all work and formulas

The Mann Company belongs to a risk class for which the appropriate discount rate is 12 percent. The company currently has 222,000 outstanding shares selling at $114 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. a. What will be the price of the stock on the ex-dividend date if the dividend is declared? (Do not round intermediate calculations.) 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.) c. If the company makes $4.7 million of new investments at the beginning of the period, 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 its funding needs? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Price of the stock а. b. Price of the stock Number of shares C.

Answer 1

First understand what is the significance of discount rate of 12%.
This also means that expected return on the stock is 12%.

If no dividend is declared price of stock after 1 year will be = Price Today * (1 + expected return)

So price of stock in case of no dividend = 114*(1 + 12%) = 127.68

Now, if dividend to be paid at the end of the year is $4, share price will reduce by $4.
In case of dividend share price = 127.68 - 4 = 123.68

Alternatively, Using standard formulas -
P0 = (P1 + D1)/(1 + R) to get the same answer.

For dividend case -
144 = (P1 + 4)/1.12
P1 = 123.68

For case of no dividend -
144 = (P1 + 0)/1.12
P1 = 127.68

Part 1:

$123.68

Part 2:

$127.68

Part 3:

Immediate outflow on investments = $4.7 million
Net Income for the year = $2.1 million
Dividend to be paid = $4 per share
Number of shares outstanding = 222,000
Current Share Price = $114
Appropriate Discount Rate = 12%

As company needs the funding at the beginning of the year, when share price is $114
Number of shares to be issues = $4.7 million/$114 = 41,228.07

Hence company should issue 41,229 shares.