Redo Problem 22, but assume the following: a. Investors pay a 15% tax on dividends but no capital…

Redo Problem 22, but assume the following:

a. Investors pay a 15% tax on dividends but no capital gains taxes or taxes on interest income, and Kay does not pay corporate taxes.

b. Investors pay a 15% tax on dividends and capital gains, and a 35% tax on interest income, while Kay pays a 35% corporate tax rate.

Problem 22

Assume capital markets are perfect. Kay Industries currently has $100 million invested in shortterm 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.

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?