Assume capital markets are perfect. Kay Industries currently has $ 125 million invested inshort-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 aone-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 thisplan, what would happen to the value of Kay stock upon the announcement of a change inpolicy?

A.

The value of Kay would fall by $125 million.

B.

The value of Kay would rise by $125million30%=$38 million.

C.

The value of Kay would rise by $ 125 million.

D.

The value of Kay would remain the same.

b. What would happen to the value of Kay stock on theex-dividend date of theone-time dividend?

A.

The value of Kay would fall by $125 million.

B.

The value of Kay would rise by$125million30%=$38 million.

C.

The value of Kay would rise by $125 million.

A.

The value of Kay would rise by $125 million.

B.

The value of Kay would remain the same.

C.

The value of Kay would fall by $125 million.

D.

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

c. Given these pricereactions, will this decision benefitinvestors?

A.

It will neither benefit nor hurt investors.

B.

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

C.

It will hurt investors.

D.

It will benefit investors.