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 12 percent. Mann currently has 232,000 outstanding shares selling at $134 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 $5.7 million of new investments at the beginning of the period, earns net income of $3.1 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.)

The Mann Company belongs to a risk class for which the appropriate discount rate is 12 percent. Mann currently has 232,000 outstanding shares selling at $134 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) As per MM Aproach - P1 = Po x(1+ re) -D1 P0 = 134 Re = 12% (Assuming it is Equity cost of capital) D1 = 4 P1 = 134 x 1.12 - 4 = 146.08 b) If dividend not Paid - P1 = Po x(1+ re) -D1 p1 = 134 x 1.12 - 0 = 150.08 c) Investment 5700000 Since the investment is to be made today the net income that is yet to be received and the dividend yet to be paid can not be used for financing project. total amount of investment is to be arranged from sale of equity. no. of share to be issued at current price= 5700000/134= 42537.31 If the investment is to be made at the end of the year -no. of shares to be issued at P1 = Investment - (Net income - Dividend to existing shareholders) divided by 146.08 Amount to be financed 5700000- (3100000 - 4 x 232000) = 3528000 Price = 146.08 No of shares to be issued = 24151.15 Please provide feedback…. Thanks in advance…. :-)

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.