Blueberry-Pi Limited has spent $3 billion on developing a new single board computer over the past 4 years. The company now has 3 mutually exclusive options: 1) The company can manufacture the single board computer itself in which case the plant will cost $5 billion. Additional working capital of $2.1 billion will be required when production commences. The expected sales and selling prices are as follows:

Year	1	2	3	4	5
Number sold (in million)	100	100	100	80	80
Selling price (4)	120	120	120	100	90

The company usually depreciates plant of this type over 5 years using the straight-line method and assumes no scrap value. Variable costs are expected to be $65 per unit and other fixed cost is 2,000 million per year. Applicable tax rate for the company is 20%. The company will accept the new product if the new product can payback within 3 years.

2) Sell the know-how to one of its major competitors for a single payment of $3.5 billion.

3) Sell the know-how for a royalty of $10 per unit.

For option 1), the company may accept the new product if the new product can payback within 3 years and it can generate sufficient profit to the company.

For option 2) and 3), the company will not manufacture the product itself.

The information about the companys current capital structure are as follows:

i. The common stock is now trading at $15.65. We have used analysts estimates to determine that the market believes our dividends will grow at 6% per year and the expected dividend next year will be $2. The number of shares outstanding is 200 million.

ii. The companys 20-year bonds that pay semi-annual coupon rate of 9% is now selling at $975. The face value of the bond is $1,000 and there are 500,000 bonds outstanding.

iii. The price companys 8% preferred share is 93% of its par value ($100). The number of shares outstanding is $10 million.

Question:

f. Nolan, the companys finance manager, suggests that the company may consider issuing equity warrant as a new source of fund. Do you agree? Please discuss in detail. (10 marks)

g. Tom believes the company should use the extra cash to pay a special one-time dividend. How will this proposal affect the stock price? Please discuss in detail. (6 marks)

h. Jessica, the companys accountant, believes that the company should use the extra cash to pay off debt and upgrade and expand its existing manufacturing capability. How would Jessicas proposal affect the company? Please discuss in detail. (8 marks)

i. Nolan is in favor of a share repurchase. He argues that a repurchase will increase the companys P/E ratio. Is his argument correct? How will a share repurchase affect the value of the company? Please discuss in detail. (8 marks)

j. Another option discussed by Tom, Jessica and Nolan would be to adopt the residual dividend policy. How would you evaluate this proposal? Please discuss in detail. (8 marks)