The Mann Company belongs to a risk class for which the appropriate discount rate is 10 percent.

Question:

The Mann Company belongs to a risk class for which the appropriate discount rate is 10 percent. The company currently has 260,000 outstanding shares selling at $107 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.

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 the company makes $3.8 million of new investments at the beginning of the period, earns net income of $1.75 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?

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...

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