Q: The Well Company belongs to a risk class for which the appropriate discount rate is 10%. Well currently has 100,000 outstanding shares selling at $100 each. The firm is contemplating the declaration of a $5 dividend at the end of the fiscal year that just began. Answer the following questions based on the Miller and Modigliani model. If Well makes $2 million of new investments at the beginning of the period, earns net income of $1 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?
A: Mann's outflows for investments are $2,000,000. These outflows occur immediately. One year from now, the firm will realize $1,000,000 in net income and it will pay $500,000 in dividends, but the need for financing is immediate. Mann must finance $2,000,000 through the sale of shares worth $100. It must sell $2,000,000 / $100 = 20,000 shares.
My question:
The answer is the correct answer. I am wondering can I just say:it needs 2,000,000/100= 20,000 shares?
If I can, why the question gives "net income"?
If I cannot, what is difference?