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Business, 24.04.2020 19:57 bobiscool3698

Assume that the only capital market imperfection is taxes. Kay Industries currently has $ 125 million invested in short-term Treasury securities paying 6 % comma 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 that Kay must pay a corporate tax rate of 21 %, investors pay no taxes, and there is no taxable gain from the sale of the securities. 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? 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? (Select the best choice below.) A. The value of Kay would remain the same. B. The value of Kay would fall by $ 125 million. C. The value of Kay would rise by $ 125 million. D. The value of Kay would rise by $ 125 million times 21 % equals $ 26 million.

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Assume that the only capital market imperfection is taxes. Kay Industries currently has $ 125 millio...
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