The Asbestos Company belongs to a risk class of which the appropriate capitalization rate is 10 per cent. It currently has 1,00,000 shares selling at Rs 100 each. The firm is contemplating the declaration of Rs 6 dividend at the end of the current fiscal year, which has just begun. Answer the following questions based on Modigliani and Miller model and the assumptions of no taxes. a) What will be the price of the shares at the end of the year, if a dividend is not declared? What will it be if it is declared? b) Assuming that the firm pays dividend, has a net income of Rs 10,00,000 and makes new investments of Rs 20,00,000 during the period, how many new shares must be issued?

The Asbestos Company belongs to a risk class of which the appropriate capitalization rate is 10 per cent. It currently has 1,00,000 shares selling at Rs 100 each. The firm is contemplating the declaration of Rs 6 dividend at the end of the current fiscal year, which has just begun. Answer the following questions based on Modigliani and Miller model and the assumptions of no taxes. a) What will be the price of the shares at the end of the year, if a dividend is not declared? What will it be if it is declared? b) Assuming that the firm pays dividend, has a net income of Rs 10,00,000 and makes new investments of Rs 20,00,000 during the period, how many new shares must be issued?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter18: Initial Public Offerings, Investment Banking, And Capital Formation

Section: Chapter Questions

Problem 2P

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