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) Using the information provided, fill in the table below:

Short-term Treasury Securities (millions) 100

Interest rate 7%

Cash for annual dividend (millions) ????

Cash for one-time dividend (millions) ????

Present value of infinite cash flow stream (millions) ????

(b) 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?

(c) What would happen to the value of Kay stock on the ex-dividend date of the one-time dividend?

(d) Given these price reactions, will this decision benefit investors? 2. Redo the problem but assume that Kay must pay a corporate tax rate of 35%, and investors pay no taxes.

3. Redo the problem but assume that investors pay a 15% tax on dividends but no capital gains taxes, and Kay does not pay corporate taxes.

4. Redo the problem but assume that investors pay a 15% tax on dividends and capital gains, and a 35% tax on interest income, while Kay pays a 35% corporate tax rate.