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Question:
Agro-chemicals company belongs to a risk class for which the appropriate capitalization rate is 10%. It currently has 1,000,000 shares selling at Ksh. 100 each.
The firm is contemplating the declaration of Ksh. 5 dividend at the end of the current financial year which has just began.
What will be the price of the share at the end of the year, if a dividend is not declared?
What will it be if dividend is declared?. Answer these questions on the basis of Modigliani and Miller model and assume no taxes
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This assignment contains solution for the calculation of the price of share when the dividends are paid or not paid. The calculation is done on the basis of the MM approach. This formula takes into consideration the amount of the dividend paid, current share price and the capitalization rate for the purpose of calculating the price at the end of the current year.
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