Address the following questions clearly explaining your answers.

Mountain plc is a quoted company with a year end of 31 December. The directors have traditionally published the financial statements in the second week of February following the year end and have always announced the dividend for the year alongside the publication of the financial statements. Mountain ple's dividend has grown by between 3% and 5% each year for the past eight years. During September 2016 the directors updated their projections of Mountain ple's financial position. They realised that it would probably not be prudent to increase the dividend compared to last year. Indeed, it may be desirable to reduce the dividend by 5% compared to that for the year ended 31 December 2015. Mountain ple continues to be profitable. However, a large loan has been negotiated in order to fund expansion. If the market's expectations concerning the dividend for the year ended 31 December 2016 are met then the company's projected gearing ratio will be at the upper limits of the terms specified by the lender. The directors themselves would be uncomfortable with a gearing ratio that was that high. The directors are debating the best way to address the question of the dividend. Three suggestions have been made: Announce the expected reduction in dividend immediately (i.e. in September 2016) with a clear explanation of the reasons. Wait and announce the reduced dividend, again with an explanation of the reasons, at the publication of the financial statements (i.e. in February 2017). Maintain the dividend growth, but organise a rights issue in order to ensure that there is sufficient equity to maintain the gearing ratio at an acceptable level. (i) Explain why both the lender and Mountain ple's directors would wish to set an upper limit for the company's gearing ratio. [8] (ii) Discuss the advantages and disadvantages of announcing the proposed reduction in the dividend in September 2016 or in February 2017. [6] (iii) Discuss the advantages and disadvantages of conducting a rights issue to raise equity in order to continue the trend of dividend growth. [6] [Total 20]Let X and Y' have joint density function: fx.r(x. y) = 3x- + xy) 0