QUESTION 1 The Irish based company Neutrono Neutral is considering a cash dividend to be paid to its investors The details of the proposed dividend are given in the following table Use the information to answer the questions Price per share 120 Proposed dividend per share 10 Ex dividend date 3 April Current date 1 April Investor tax rate 0 Number of shares outstanding 1,000,000 a) What is the total paid in dividends to the firms shareholders on (or shortly after) 3 April What is the expected share price on the 2 nd of April What is the expected share price on the 3 rd of April You should assume there are no transaction costs associated with the dividend payment Now suppose the firm carries out a share buy back scheme on the 3 rd of April where the firm buys an amount of stock equivalent to the total planned dividend payment What are the expected share prices on the 2 nd and 3 rd of April now How many shares are outstanding after the share buy back scheme is carried out Review the logic underpinning Modigliani and Millers dividend policy irrelevance theorem Discuss how this logic is affected if payout is costly in terms of transaction costs, and if payouts may represent a signal of private information to the firms investors (signaling models of dividend policy) QUESTION 2 The Intense Growth Company is considering investing in a project where the investment cost is 200 The firm estimates that the present value of the investment may go up or down, according to the data given in the following table There are no cash flows from the project over the next 2 years Use this information to answer the questions Current present value 195 Investment cost 200 Probability of an annual increase in present 40 value Probability of an annual reduction in 60 present value Present value following an increase 30 higher than the previous year Present value following a decrease 20 lower than the previous year Risk free rate of return 3 per year Scrap value of equipment in year 2 150 What is the NPV of investing in this project right now You should ignore the option to sell the equipment for scrap after 2 years Work out the optimal investment plan over a 2 year planning horizon You should now include the option to sell the equipment for scrap after 2 years Discuss how real options often arise in corporate finance, and why we cannot use a discounted cash flow approach to value such options using a risk adjusted discount rate Give at least three examples of such real options

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QUESTION 1 The Irish-based company Neutrono-Neutral is considering a cash dividend to be paid to its investors. The details of the proposed dividend are given

QUESTION 1

The Irish-based company Neutrono-Neutral is considering a cash dividend to be paid to its investors. The details of the proposed dividend are given in the following table. Use the information to answer the questions.

	Price per share	120
	Proposed dividend per share	10
	Ex-dividend date	3 April
	Current date	1 April
	Investor tax rate	0
	Number of shares outstanding	1,000,000

a) What is the total paid in dividends to the firms shareholders on (or shortly after) 3 April?

What is the expected share price on the 2^nd of April? What is the expected share price on the 3^rd of April? You should assume there are no transaction costs associated with the dividend payment.

Now suppose the firm carries out a share buy-back scheme on the 3^rd of April where the firm buys an amount of stock equivalent to the total planned dividend payment. What are the expected share prices on the 2^nd and 3^rd of April now? How many shares are outstanding after the share buy-back scheme is carried out?

Review the logic underpinning Modigliani and Millers dividend policy irrelevance theorem. Discuss how this logic is affected if payout is costly in terms of transaction costs, and if payouts may represent a signal of private information to the firms investors (signaling models of dividend policy).

QUESTION 2

The Intense Growth Company is considering investing in a project where the investment cost is

200. The firm estimates that the present value of the investment may go up or down, according to the data given in the following table. There are no cash flows from the project over the next 2 years. Use this information to answer the questions.

	Current present value	195
	Investment cost	200
	Probability of an annual increase in present	40%
	value
	Probability of an annual reduction in	60%
	present value
	Present value following an increase	30% higher than the previous year
	Present value following a decrease	20% lower than the previous year
	Risk free rate of return	3% per year
	Scrap value of equipment in year 2	150

What is the NPV of investing in this project right now? You should ignore the option to sell the equipment for scrap after 2 years.

Work out the optimal investment plan over a 2-year planning horizon. You should now include the option to sell the equipment for scrap after 2 years.
Discuss how real options often arise in corporate finance, and why we cannot use a discounted cash flow approach to value such options using a risk-adjusted discount rate. Give at least three examples of such real options.