Response to the following problem:
Assume perfect capital markets. Kay Industries currently has $100 million invested in short-term Treasury securities paying 7%, 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.
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 onetime dividend?
c. Given these price reactions, will this decision benefit investors?