Long Term Financial Management

QUESTION 1. Suppose we live in a world in which Modgliani Miller is true, that is no information or tax issues and capital structure is irrelevant.

A firm currently has 1,000 shares outstanding, each with a price of $210.

The firm announces a 1 for 5 “Rights Issue” of new stock, that is each stock holder would have the right to buy 1 stock for 5 stocks currently held. The price at which the new stock will be sold to existing shareholders will be $150.

Assume all shareholders act rationally in making their purchase decision, that is they purchase the Rights stock if the price they will pay will be lower than the price of the stock after the Rights issue is completed.

What will the price of the stock be after the Rights issue is completed?

QUESTION 2.

Suppose we live in a world in which Modgliani Miller is true, that is no information or tax issues and capital structure is irrelevant.

A firm currently has 1,000 shares outstanding, each with a price of $14.8.

The firm announces that it will pay a dividend of $1.25 per share. What will be the price of a share ex-dividend (that is after dividend has been paid)?