CA Inter P6 · Chapter 8 · Question 5 of 8
Under the Modigliani-Miller approach, a company with 2,00,000 equity shares expects net income of ₹ 20,00,000 for the year and plans new investment of ₹ 30,00,000. It pays a dividend of ₹ 6 per share, and the expected market price per share at the end of the year after the dividend is ₹ 106. How many new shares must it issue to finance the investment (rounded up to the next whole share)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) 20,755 shares
Explanation
Dividend paid = 2,00,000 x 6 = ₹ 12,00,000, so retained earnings = 20,00,000 - 12,00,000 = ₹ 8,00,000. New funds needed = 30,00,000 - 8,00,000 = ₹ 22,00,000. Number of new shares = 22,00,000 / 106 = 20754.72, rounded up to 20,755 shares. Using the no-dividend price of ₹ 112 would be inconsistent with the dividend being paid.
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