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

a) The stock price falls by the dividend/share to be given at the end of the year => share price on the ex-dividend date = 116*1.13-3 =$128.08

The logic is that the dividend is taken away from the expected earnings and given in the form of immediate dividend to the equity holders and hence the shares which they hold now will fall by the same amount of dividend.

b) If the dividend is not declared, then the share price by the end of the year will be 116*1.13 =131.08

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