The senior managers of Hancock Oil are evaluating a new oil exploration project. The project requires a

Question:

The senior managers of Hancock Oil are evaluating a new oil exploration project.

The project requires a large amount of capital and is quite risky, but it has the possibility of being extremely profitable. In a separate action, the company's managers are also considering increasing Hancock's dividend payout ratio. The proposed project and proposed dividend increase are both expected to increase the company's stock price.

a. How would the proposed exploration project affect Hancock's outstanding bondholders?

b. How would the proposed dividend increase affect Hancock's outstanding bondholders?

c. Should Hancock's managers go ahead with the proposed project and dividend increase?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...