Question

The Harpe Company currently has 223,000 outstanding shares selling at $116 each. The firm is contemplating the declaration of a dividend of $3 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 $4.8 million of new investments at the beginning of the period, earns net income of $2.2 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            

Answer 1

a)Price of stock = market price(cum dividend ) -dividend

                   = 116 -3

                   = $ 113 per share

b)price of the stock at the end of the year = $ 116 per share

c)Number of shares to issue to meet its funding needs = Amount to raise /market price

                                       = 4,800,000/ 116

                                      = 41379.31     [rounded to 41379 shares]