Assume capital markets are perfect. Kay Industries currently has $100 million invested in short-term 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?

A. The value of Kay will rise by $35 million.

B. The value of Kay will remain the same

C. The value of Kay will fall by $100 million.

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

A. The value of Kay will fall by $100 million.

B. The value of Kay will rise by $35 million.

C. The value of Kay will remain the same.

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

A. It will neither benefit nor hurt investors.

B. It will hurt investors.

C. It will benefit investors.

d. Assume now that Kay must pay a corporate tax rate of 35%, and investors pay no taxes. 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?

A. The value of Kay will rise by $35 million.

B. The value of Kay will fall by $100 million.

C. The value of Kay will remain the same.

e. Assume now that Kay must pay a corporate tax rate of 35%, and investors pay no taxes. What would happen to the value of Kay stock on the ex-dividend date of the one-time dividend?

A. The value of Kay will rise by $35 million.

B. The value of Kay will fall by $100 million.

C. The value of Kay will remain the same.

f. Assume now that Kay must pay a corporate tax rate of 35%, and investors pay no taxes. Given these price reactions, will this decision benefit investors?

A. It will benefit investors.

B. It will neither benefit nor hurt investors.

C. It will hurt investors.