Problem 16-10 Dividends and Stock Price The Harpe Company currently has 238,000
ID: 2657374 • Letter: P
Question
Problem 16-10 Dividends and Stock Price
The Harpe Company currently has 238,000 outstanding shares selling at $146 each. The firm is contemplating the declaration of a dividend of $4 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? (Do not round intermediate calculations.)
Price of the stock $
b. 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.)
Price of the stock $
c. If the company makes $6.3 million of new investments at the beginning of the period, earns net income of $3.7 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.)
Number of shares
Explanation / Answer
MM Theory says that dividend does not have repercussions on the price of the stock a) On the Ex-dividend date, the price of the share would decrease by dividend per share So new share price 142.00 b) If dividend is not declared, the price of the stock would remain same Share price 146.00 c) Old number of shares 238000 Additional share issued N Dividend 4 Share price 146 So, N*146+3700000-6300000=(N+238000)*4 N = 25014.08 ~ 25014