national business

1. The Soltec company belongs to a risk class for which the appropriate discount rate is 10% 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? G If the company makes $38 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? 2. National Business Machine Co (NBM) has $4 9 million of extra cash after taxes have been paid. NBM has two choices to make use of this cash. One alternative is to invest the cash in financial assets. The resulting investment income will be paid out as a special dividend at the end of three years in this case, the firm can invest in either Treasury bills yielding 3% or 5% preferred stock IRS regulations allow the company to exclude from taxable income 70% of the dividends received from investing in another company's stock Another alternative is to pay out the cash now as dividends. This would allow the shareholders to invest on their own in Treasury bills with the same yield or in preferred stock. The corporate tax rate is 21%. Assume the investor has a 31% personal income tax rate, which is applied to interest income and preferred stock dividends. The personal dividend tax rate is 15% on common stock dividends Should the cash be paid today or in three years? Which of the two options generates the highest after-tax income for the shareholders