Question
Party Land Corporation is an all equity firm with 100 million shares outstanding. The market value of its assets is $6 billion of which $2
Party Land Corporation is an all equity firm with 100 million shares outstanding. The market value of its assets is $6 billion of which $2 billion is cash and is currently permanently invested in short-term Treasury securities paying 2% and pays out the interest payments on these securities as a dividend. The board is considering a surprise announcement about selling the Treasury securities and paying out the proceeds as a one-time dividend payment. If both corporate tax rate and dividend tax rate are 20%, by how much does the stock price (per share) change in response to this announcement? [Hint: Calculate the total taxes for each of the two scenarios.]
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