Question $1$

Matilda Armond is a director and major shareholder of SniBound Plc$.$ The Board has recently approved a major expansion proposal at a cost of $600,000,$ and the question of how the project should be financed must now be addressed.

The level of dividends paid in recent years has been $0\mathrm{.}90$ per share, and everyone had expected that the same dividend per share would be paid in the current year. However, the Director of Finance has now proposed that the dividend on ordinary shares should be reduced in the current year, and the cash saved should be used to finance the project.

As the holder of $25,000$ shares in the company, Matilda Armond is worried that the reduction in the dividend would represent a substantial decrease in her income compared to what she had expected. Unwilling to tolerate a major change in her lifestyle, she plans to oppose the motion to reduce the dividend and to propose instead that the dividend of $0\mathrm{.}90$ per share be paid as scheduled at the end of the month, and that the project then be financed by a new issue of shares $($ex dividend$).$

SniBound Plc is financed entirely with equity. The company has an issued share capital of $900,000$ shares with a market value of $12\mathrm{.}90$ each. This value is assumed to incorporate the positive net present value of the proposed expansion project since all technical and financial details were announced to the market by SniBound immediately following the approval of the project by the board.

Required:

$*($a$)$Assume that the capital market is perfect in all respects. Prepare calculations to demonstrate to Matilda that she should be indifferent between the Finance Director$$s proposal to finance the project by cutting the dividend and his proposal to finance the project with the proceeds of a fresh issue of shares.