Hopper is a risk-neutral lender who has the choice of loaning $100,000 to Manny Ltd. for one year, or investing the money in 6% government bonds. Manny offers to pay 8% interest on the loan. If Manny pays no dividends during the course of the loan, Hopper assesses the probability of repayment as 99%. However, if large dividends are paid by Manny, Hopper assumes the likelihood of repayment is only 90%. Hopper assumes there's a 50/50 chance of Manny taking either action.

REQUIRED

a) Will Hopper loan the money to Manny? Why or why not?

b) Now, assume that Manny agrees to not pay dividends for the life of the loan. Will this change Hopper's decision on whether to loan the money to Manny?

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