Assume capital markets are perfect. Kay Industries currently has $125 million invested in short-term Treasury securities paying 8%, and it pays out the interest payments on these securities 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 30%and investors pay no taxes.

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?