Assume capital markets are perfect. Kay industries currently has $150 million invested in short-term 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 investors pay a 20% tax on capital gains and a 21% tax on interest income, while Kay pays a 21% corporate tax rate.

a. If the board went ahead with this plan, what would happened 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?