Assume capital markets are perfect. Kay Industries currently has $100 million invested in shortterm Treasury securities paying 7%, and it pays out the interest payments on these securities each year as a dividend. The board is considering selling the Treasury securities and paying out the proceeds as a one-time dividend payment.

a. If the board went ahead with this plan, what would happen to the value of Kay stock upon the announcement of a change in policy?

b. What would happen to the value of Kay stock on the ex-dividend date of the one-time dividend?

c. Given these price reactions, will this decision benefit investors?

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