Question Three

The Irish-based company Neutrono-Neutral is considering paying a cash dividend to its investors. The table sets out the details of the proposed dividend. 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

1. What is the total paid in dividends to the firms shareholders on (or shortly after) the 3 April? (5 marks)
2. 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. (10 marks)
3. 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 carrying out the share buy-back scheme? (15 marks)
4. Review the logic underpinning Modigliani and Millers dividend policy irrelevance theorem. Discuss how this logic is affected if the 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). (20 marks)

(50 marks in total)