Question - Assume capital markets are perfect. Kay Industries currently has $ 200 million 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 investors pay a 15 % tax on dividends and capital gains, and a 40 % tax on interest income, while Kay pays a 40 % corporate tax rate.
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? Would it rise or fall by how many million
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?