Reference no: EM131965565
Kay Industries currently has $100 million invested in short term Treasury securities paying 7%, and it pays out the interest payments on these securities each year as a dividend. The board is considering selling the Treasury securities and paying out the proceeds as a one-time dividend payment. Assume the following:
Investors pay a 15% tax on dividends but no capital gains taxes or taxes on interest income, and Kay does not pay corporate taxes.
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?
Investors pay a 15% tax on dividends and capital gains, and a 35% on interest income, while Kay pays a 35% corporate tax rate.
d. 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
e. What would happen to the value of Kay stock on the ex-dividend date of the one-time dividend?
f. Given these price reactions, will this decision benefit investors?
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