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. Assume that Kay must pay a corporate tax rate of

35%,

and investors pay no taxes.

a. If the board went ahead with this plan, what would happen to the value of Kay Industries upon the announcement of a change in policy?(Select the best choice below.)

A.

The value of Kay would remain the same.

B.The value of Kay would rise by

$100

million.

C.The value of Kay would rise by

$10035%=$35 million.

D.The value of Kay would fall by

$100

million.

b. What would happen to the value of Kay Industries on the ex-dividend date of the one-time dividend?(Select the best choice below.)

A.The value of Kay would fall by

$100

million.

B.

It's difficult to tell because the price reaction depends on investor preferences.

C.

The value of Kay would remain the same.

D.The value of Kay would rise by

$100

million.

c. Given these price reactions, will this decision benefit investors?(Select the best choice below.)

A.

It will hurt investors.

B.

It's difficult to tell because the price reaction depends on investor preferences.

C.

It will benefit investors.

D.

It will neither benefit nor hurt investors.