Question

The Harpe Company currently has 237,000 outstanding shares selling at $144 each. The firm is contemplating the declaration of a dividend of $3 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 $0 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 $0 c. If the company makes $6.2 million of new investments at the beginning of the period, earns net income of $3.6 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

Answer 1

If the dividend is declared, the price of the stock will drop on the ex-dividend date by thevalue of the dividend, $3. It will then trade for $141 If dividend is not declared, the price will remain at $144 Harpe Company outflows for investments are $6,200,000. These outflows occur immediately. Oneyear from now, the firm will realize $3,600,000 in net income and it will pay $711,000 in dividends, but the need for financing is immediate. Harpe must finance $6,200,000 through the sale of shares worth $144. It must sell $6,200,000/$144 = 43056shares