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Assume capital markets are perfect. Kay Industries currently has $150 million invested in short-term Treasury securities paying 6%, and it pays out the interest payments
Assume capital markets are perfect. Kay Industries currently has $150 million invested in short-term Treasury securities paying 6%, 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 investors pay a 20% tax on dividends but no capital gains taxes nor taxes on interest income, and Kay does not pay corporate 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? 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? (Select the best choice below.) A. The value of Kay would rise by $150 million $150 million 20%=$120 million. B. The value of Kay would remain the same. C. The value of Kay would fall by $150 million. D. The value of Kay would rise by $150 million. b. What would happen to the value of Kay stock on the ex-dividend date of the one-time dividend? (Select the best choice below.) A. The value of Kay would rise by $150 million. B. The value of Kay would remain the same. C. The value of Kay would fall by $150 million $150 million 20%=$120 million. D. The value of Kay would fall by $150 million. c. Given these price reactions, will this decision benefit investors? (Select the best choice below.) A. It will hurt investors. B. It will neither benefit nor hurt investors. C. It's difficult to tell because the price reaction depends on investor preferences. D. It will benefit investors
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