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quence, re… Show more Paul is a shareholder of the Superte

quence, re… Show more Paul is a shareholder of the Supertech company: he holds 10% of the shares and, in conse- quence, receives 10% of the dividends paid by the company. Being a large shareholder, he is on the Board of Directors of the company. In this quality he must vote on whether or not the company will undertake a big development project to enter the European market. Paul does a simple calcu- lation: he divides his life into two periods: the “present” (date 0) and the “future” (date 1). If the company does not make the project it will distribute $1,000,000 in dividends at date 0 and at date 1. If the company undertakes the project, it will use part of its earning at date 0 to invest in the project and distribute only $400,000 in dividends. However in the future it will make more pro t and distribute $1,800,000 in dividends at date 1. Paul will receive from other sources of income $100,000 at date 0 and $30,000 at date 1. He can borrow or save with an interest rate of 10% (a) Calculate (i) the present value of the project considered by the company (you can estimate the cost and the revenue of the project from the information given above) (ii) the present value of Paul’s total income (i.e. income at date 0 and income at date 1) if Supertech does not undertake the development project (iii) the present value of Paul’s total income if Supertech undertakes the development project (the dividends are di erent in (ii) and (iii)) (b) What is the interpretation of the di erence between the values of (ii) and (iii) of the previous question? (c) Paul needs to buy a new house. In order to do so and satisfy his other needs, he needs to spend $250,000 at date 0. Suppose the company does not do the development project. How much will John need to borrow? How much will he be able to spend at date 1? (d) If the company undertakes the investment, how much will John need to borrow to spend the same 250,000 at date 0? How much will he be able to spend at date 1? (e) Will Paul vote for or against the development project? Explain why. (f) Do you expect the vote of the Directors to be unanimous? Explain your answer. • Show less

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