The seniors managers at ABC Oil Company 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 ABC'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 ABC's outstanding
  bondholders?

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

is not that (a part of) a homework task ?
sorry.It seems to be against ga policy.

What my pal Anton said - GA will nto do someone's homework for them.

Lets see.

Increasing a dividend payout will hurt bondholders.  It is taking cash
(i.e. security) away from the bond holders.  This means if the firm
enters financial distress, it will be more difficult to pay off
investors.  On another note, increasing dividends should not increase
stock price either.  A basic tenant of fiannce is that ina perfect
market, dividend policy is irrelevant.

As far as a risky project, it will also likely hurt bondholders.  The
riskier the project, the more it hurts bondholders and helps
shareholders.  If a company is in distress, investing in a risky
project leaves the shareholder withnothing to lose.  A bondholder
would bear the risk and expense of the project while shareholders
would only get the plus side.  Bondholders generally do not want to
face this kind of risk; it they wanted that they would be equity
holders and not bondholders.

Yeah, this sounds like school work to me.

One clarification, increasing the dividend payout ratio may increase
stock price and may make bondholders feel more secure because it is a
signaling device.  it tell the world that the company believes it will
be able to have enough cash on hand now and into the indifinite fture
to meet the dividend expectations of its shareholders.  of course,
another way to look at it the firm may just use this as a means to
become more levered.. which may hurt bondholders or perhaps the firm
doesnot have enough profitable opportunities before it to spend cash
on.