22. Assume capital markets are perfect. Kay Industries currently has $100 million invested in short- term...

Transcribed Image Text:

22. Assume capital markets are perfect. Kay Industries currently has $100 million invested in short- term Treasury securities paying 7%, and it pavs out the interest payments on these securities cach year as a dividend. The board is considering selling the Treasury securities and paying out the procceds as a one-time dividend 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? payment. C. Given these price reactions, will this decision benefit investors? 23. Redo Problem 22, but assume that Kay must pay a corporate tax rate of 35%, and investors pay no taxes. 24. Harris Corporation has $250 million in cash, and 100 million shares outstanding. Suppose the corporate tax rate is 35%, and investors pay no taxes on dividends, capital gains, or interest income. Investors had expected Harris to pay out the $250 million through a share repurchase. Suppose instead that Harris announces it will permanently retain the cash, and use the interest on the cash to pay a regular dividend. If there are no other benefits of retaining the cash, how will Harris's stock price change upon this announcement? 25. 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. 22. Assume capital markets are perfect. Kay Industries currently has $100 million invested in short- term Treasury securities paying 7%, and it pavs out the interest payments on these securities cach year as a dividend. The board is considering selling the Treasury securities and paying out the procceds as a one-time dividend 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? payment. C. Given these price reactions, will this decision benefit investors? 23. Redo Problem 22, but assume that Kay must pay a corporate tax rate of 35%, and investors pay no taxes. 24. Harris Corporation has $250 million in cash, and 100 million shares outstanding. Suppose the corporate tax rate is 35%, and investors pay no taxes on dividends, capital gains, or interest income. Investors had expected Harris to pay out the $250 million through a share repurchase. Suppose instead that Harris announces it will permanently retain the cash, and use the interest on the cash to pay a regular dividend. If there are no other benefits of retaining the cash, how will Harris's stock price change upon this announcement? 25. 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.

Answer rating: 100% (QA)

ANSWER 1 The correct account the questions are given below a the right answer is C the worth of Kay would remain an equivalent this is often due to th... View the full answer