Ropeonfire is currently deciding on the level and form of its next dividend. It is considering three options:

(i) a cash dividend payment of 20p per share;

(ii) a 6 per cent scrip dividend;

(iii) a repurchase of 15 per cent of ordinary share capital at the current market price.

The company’s financial statements are given below:

(a) If the current cum dividend share price is 420p, calculate the effect of the three options on the wealth of a shareholder owning 1000 shares in Ropeonfire.

(b) Explain briefly how the company’s decision will be influenced by the opportunity to invest £60m in a project with a positive net present value.

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Income statement Operating profit Net interest earned Taxation million million 18.0 5.0 23.0 Distributable earnings 7.3 15.7 Financial position statement Non-current assets 70 70 Current assets: Accounts receivable 22 Inventory 21 Cash 41 84 Current liabilities (31) 123 Financed by: Ordinary share capital (50p shares) Reserves 20 103 123