Question 2 a. Glasgow Corporation's has $20 million in excess cash. The firm expects to generate future free cash flows of $48 million per year. The firm is 100% equity financed, and its equity cost of capital is 12%. The firm has 10 million shares outstanding The firm is evaluating two options on how to pay out to shareholders this year: 1) paying dividend of $2 or $4 per share using the existing $20 million cash, and 2) paying a dividend of $4 per share, and raising additional $28 million cash cash by selling new shares. Consider a perfect capital market where corporate and personal taxes, costs of bankruptcy or financial distress do not exist. Demonstrate that either way of the dividend policy is irrelevant to the share price of the firm. (50 MARKS) b. In the real world, we continue to observe firms paying dividends instead of retaining cash. We also observe positive stock price responses to the announcement of dividend increases i Critically discuss the explanations. In your discussion draw evidence and arguments from the literature wherever possible. (30 MARKS) Discuss the disadvantages of paying out dividends instead of retaining cash in the real world. (10 MARKS) Question 2 a. Glasgow Corporation's has $20 million in excess cash. The firm expects to generate future free cash flows of $48 million per year. The firm is 100% equity financed, and its equity cost of capital is 12%. The firm has 10 million shares outstanding The firm is evaluating two options on how to pay out to shareholders this year: 1) paying dividend of $2 or $4 per share using the existing $20 million cash, and 2) paying a dividend of $4 per share, and raising additional $28 million cash cash by selling new shares. Consider a perfect capital market where corporate and personal taxes, costs of bankruptcy or financial distress do not exist. Demonstrate that either way of the dividend policy is irrelevant to the share price of the firm. (50 MARKS) b. In the real world, we continue to observe firms paying dividends instead of retaining cash. We also observe positive stock price responses to the announcement of dividend increases i Critically discuss the explanations. In your discussion draw evidence and arguments from the literature wherever possible. (30 MARKS) Discuss the disadvantages of paying out dividends instead of retaining cash in the real world. (10 MARKS)