The Mann Company belongs to a risk class for which the appropriate required equity return is 15 percent. It currently has outstanding 100,000 shares selling at $100 each. The firm is contemplating the declaration of a $5 dividend at the end of the current fiscal year, which just began. Answer the following questions based on the Modigliani and Miller model and the assumption of no taxes.

a. (1) What will be the price of the stock at the end of the year if a dividend is not declared? (2) What will it be if one is?

b. Assuming that the firm pays the dividend, has net income of $1 million, and makes new investments of $2 million during the period, how many new shares must be issued?

c. Is the MM model realistic with respect to valuation? What factors might mar its validity?