Assume capital markets are perfect. Kay Industries currently has 200 million invested in short-term Treasury securities
Posted: Sun Jul 03, 2022 1:14 pm
Assume capital markets are perfect. Kay Industries currently has200 million invested in short-term Treasury securities paying 8%and it pays out the interest payments on these securities as adividend. The board is considering selling the Treasury securitiesand paying out the proceeds as a one-time dividend payment. Assumethat investors pay a 15% tax on dividends but no capital gainstaxes nor taxes on interest income, and Kay does not pay corporatetaxes.
a. If the board went ahead with this plan, what would happen tothe value of Kay stock upon the announcement of a change inpolicy?
b. What would happen to the value of Kay stock on theex-dividend date of the one-time dividend?
c. Given these price reactions, will this decision benefitinvestors?
If the board went ahead with this plan, what would happento the value of Kay stock upon the announcement of a changein policy? (Select the best choice below.)
A.The value of Kay would fall by $200 million.
B.The value of Kay would rise by$200 million−$200 million×15%=$170 million.
C.The value of Kay would rise by $200 million.
D. The value of Kay would remain the same.
Part 2
b. What would happen to the value of Kay stock onthe ex-dividend date of the one-timedividend? (Select the best choice below.)
A.The value of Kay would remain the same.
B.The value of Kay would fall by $200 million.
C.The value of Kay would fall by$200 million−$200 million×15%=$170 million.
D.The value of Kay would rise by $200 million.
Part 3
c. Given these price reactions, will this decisionbenefit investors? (Select the bestchoice below.)
A.It will hurt investors.
B.It's difficult to tell because the price reaction depends oninvestor preferences.
C.It will neither benefit nor hurt investors.
D.It will benefit investors.
a. If the board went ahead with this plan, what would happen tothe value of Kay stock upon the announcement of a change inpolicy?
b. What would happen to the value of Kay stock on theex-dividend date of the one-time dividend?
c. Given these price reactions, will this decision benefitinvestors?
If the board went ahead with this plan, what would happento the value of Kay stock upon the announcement of a changein policy? (Select the best choice below.)
A.The value of Kay would fall by $200 million.
B.The value of Kay would rise by$200 million−$200 million×15%=$170 million.
C.The value of Kay would rise by $200 million.
D. The value of Kay would remain the same.
Part 2
b. What would happen to the value of Kay stock onthe ex-dividend date of the one-timedividend? (Select the best choice below.)
A.The value of Kay would remain the same.
B.The value of Kay would fall by $200 million.
C.The value of Kay would fall by$200 million−$200 million×15%=$170 million.
D.The value of Kay would rise by $200 million.
Part 3
c. Given these price reactions, will this decisionbenefit investors? (Select the bestchoice below.)
A.It will hurt investors.
B.It's difficult to tell because the price reaction depends oninvestor preferences.
C.It will neither benefit nor hurt investors.
D.It will benefit investors.