**URGENT:*** The Mann Company belongs to a risk class for which the appropriate
ID: 2804673 • Letter: #
Question
**URGENT:***
The Mann Company belongs to a risk class for which the appropriate discount rate is 14 percent. Mann currently has 224,000 outstanding shares selling at $118 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 $4.9 million of new investments at the beginning of the period, earns net income of $2.3 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 14 percent. Mann currently has 224,000 outstanding shares selling at $118 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
Answer a.
Ex-dividend date is two days after the dividend record date and the price of share falls in proportion or by the amount of dividend declared.
Thus if the share is trading at 118 and declared dividend is 4
The the price of the stock on the ex-dividend date if the dividend is declared = 118-4 = $114
Answer b.
The price of the stock at the end of the year if the dividend is not declared = 118-0 = $118
Answer c.
Company needs 4.9million in new investment
net income the company earns = 2.3 million
Declares dividend of $4 for 224000 outstanding shares. Thus total dividend paid = 4*224000 = 896,000
and share price if the dividend is declared will be 118-4 = $114
Thus new stock the firm must issue to meet its funding needs = 4900,000-(2300,000-896,000) / 114
=30,666.67 shares
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