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If Industries Ltd pays half of the cash as dividend and borrows 50,000 to make up the shortfall for the investment at 10% this will mean:

• Repayment with interest will be 55,000 to be taken from the 120,000 cash flow at the end of the year.
• This will leave 65,000 to be paid as dividend.

Question:

What will happen to Eagers wealth?

Project X Example 2.2 Project X - to invest or to spend Industries Ltd is a business owned by a number of independently minded shareholders. Three of these, Eager, Patient and Steady, own 20,000 each of the business's total of 200,000 ordinary shares. At present, Industries Ltd has only one asset, namely 100,000 in cash. Management is undecided whether to pay this cash to the shareholders as a dividend, which would amount to 10,000 (one-tenth of 100,000) in the case of each of the above trio, or to invest it in Project X. This investment project requires an initial cash investment of the whole of the 100,000 payable now, and will produce a cash receipt of 120,000 in a year's time, and then come to a close. If the project is undertaken the whole of the cash pro- ceeds will be paid as a dividend next year (12,000 each for Eager, Patient and Steady). For the time being, let us assume that there is no alternative investment project available to the business, nor any shareholdings in other businesses available to investors, also that it is not possible to borrow or lend money. Suspecting that there might be disagreement between shareholders on Project X, the management decided to call a shareholders' meeting to sound out opinion. During the meet ing the following three comments were made: Eager said that she thought Industries Ltd should not make the investment but should pay the dividend immediately because, while she does not necessarily want to spend the money now, it would be nice to have it available should some need arise. She does not consider that the additional 2,000 of dividend will compensate her for delaying. Patient said that he would prefer Project X to be undertaken because he would not in any case, spend his dividend before next year and would prefer to have 12,000 than 10,000 when he does come to spend it. Steady said that she would be in favour of Project X but that, since she needs the cash in six months' time to pay for a new extension to her house, she would reluctantly have to vote for the immediate dividend. Similarly diverse views were expressed by the business's other shareholders. Project X Example 2.2 Project X - to invest or to spend Industries Ltd is a business owned by a number of independently minded shareholders. Three of these, Eager, Patient and Steady, own 20,000 each of the business's total of 200,000 ordinary shares. At present, Industries Ltd has only one asset, namely 100,000 in cash. Management is undecided whether to pay this cash to the shareholders as a dividend, which would amount to 10,000 (one-tenth of 100,000) in the case of each of the above trio, or to invest it in Project X. This investment project requires an initial cash investment of the whole of the 100,000 payable now, and will produce a cash receipt of 120,000 in a year's time, and then come to a close. If the project is undertaken the whole of the cash pro- ceeds will be paid as a dividend next year (12,000 each for Eager, Patient and Steady). For the time being, let us assume that there is no alternative investment project available to the business, nor any shareholdings in other businesses available to investors, also that it is not possible to borrow or lend money. Suspecting that there might be disagreement between shareholders on Project X, the management decided to call a shareholders' meeting to sound out opinion. During the meet ing the following three comments were made: Eager said that she thought Industries Ltd should not make the investment but should pay the dividend immediately because, while she does not necessarily want to spend the money now, it would be nice to have it available should some need arise. She does not consider that the additional 2,000 of dividend will compensate her for delaying. Patient said that he would prefer Project X to be undertaken because he would not in any case, spend his dividend before next year and would prefer to have 12,000 than 10,000 when he does come to spend it. Steady said that she would be in favour of Project X but that, since she needs the cash in six months' time to pay for a new extension to her house, she would reluctantly have to vote for the immediate dividend. Similarly diverse views were expressed by the business's other shareholders

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