Question
Assume that the only capital market imperfection is taxes. Kay Industries currently has $ 100million invested in short-term Treasury securities paying 8 % and it
Assume that the only capital market imperfection is taxes. Kay Industries currently has $ 100million 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 25 %, investors pay no taxes, and there is no taxable gain from the sale of the securities.
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?
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