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Corporate Finance - stock price and ex-dividend date

The Mann Company belongs to a risk class for which the appropriate discount rate is 10 percent. Mann currently has 100,000 outstanding shares selling at $100 each. The firm is contemplating the declaration of a $5 dividend at the end of the fiscal year that just began. Answer the following questions based on the Miller and Modigliani model.

A. What will be the price of the stock on the ex-dividend date if the dividend is declared?
B. What will be the price of the stock at the end of the year if the dividend is not declared?
C. If Mann makes $2 million of new investments at the beginning of the period, earns net income of $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?
D. Is it realistic to use the MM model in the real world to value stock? Why or why not?

Solution Preview

A. The price of the stock will drop on the ex-dividend date by the value of the dividend here it is $5. To earn a 10% return, the price of stock should be $110. But after dividend ...

Solution Summary

The solution determines the price of the stock on the ex-dividend date is the dividend is declared. The price of the stock at the end of the year if the dividend is not declared is given.

$2.19