Question
In: Accounting
Assume capital markets are perfect. Kay Industries has $125 million invested in short-term Treasury securities paying...
Assume capital markets are perfect. Kay Industries has $125 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 that Kay must pay a corporate tax rate of 40%, and investors pay no taxes.
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?
A. The value of Kay would fall by $125 million.
B. The value of Kay would rise by $125
million.
C. The value of Kay would rise by $125 x 40% = $50 million.
D. The value of Kay would remain the same.
What would happen to the value of Kay stock on the ex-dividend
date of the one-time dividend?
A. The value of Kay would rise by $125 million.
B. The value of Kay would remain the
same.
C. It is difficult to tell because the price reaction depends on
investor preferences.
D. The value of Kay would fall by $125 million.
Given these price reactions, will this decision benefit
investors?
A. It is difficult to tell because the price reaction depends on
investor preferences.
B. It will benefit investors.
C. It will hurt investors.
D. It will neither benefit nor hurt investors.
Solutions
Expert Solution
Ans:-
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?
- Option D. is correct
Reason:-
- The declaration of profit does not influence the estimation of firm.
- This is on account of it doesn't result in income.
- Accordingly, upon declaration the estimation of firm will stay same.
What would happen to the value of Kay stock on the ex-dividend date of the one-time dividend?
- Option D is correct
Reason:-
- On ex-profit date the estimation of firm decreases by the measure of profit.
- Along these lines, on ex-profit date the estimation of firm will diminish by the measure of treasury security.
Given these price reactions, will this decision benefit investors?
- Option D is correct
Reason:-
- On account of resigning exceptional security financial specialists get a lot of interest in single installment instead of getting as far as profits periodically.
- Thus, the retirement of profit neither advantage nor hurt the speculators .
ekkarill92 answered 2 years agoRelated Solutions
Assume short-term securities yield 5% and it costs $20 for buying and selling securities. The variance...
Assume short-term securities yield 5% and it costs $20 for
buying and selling securities. The variance of the firm's daily net
cash balances is $20,000. Management keeps at least $1,000 in cash
balances. What is the maximum amount the firm will let accumulate
in its cash account before investing in marketable securities? How
much will the firm invest?
Sora Industries has 63 million outstanding shares, $ 125 million in debt, $50 million in cash,...
Sora Industries has 63 million outstanding shares, $ 125
million in debt, $50 million in cash, and the following projected
free cash flow for the next four years:
Year
0
1
2
3
4
Earnings and FCF Forecast ($ million)
1
Sales
433.0
468.0
516.0
547.0
574.3
2
Growth vs. Prior Year
8.1%
10.3%
6.0%
5.0%
3
Cost of Goods Sold
(313.6)
(345.7)
(366.5)
(384.8)
4
Gross Profit
154.4
170.3
180.5
189.5
5
Selling, General, & Admin.
(93.6)
(103.2)
(109.4)...
Sora Industries has 63 million outstanding? shares, $125 million in? debt, $44 million in? cash, and...
Sora Industries has 63 million outstanding? shares, $125 million
in? debt, $44 million in? cash, and the following projected free
cash flow for the next four? years:
Year
0
1
2
3
4
Earnings and FCF Forecast? ($ million)
1
Sales
433.0
468.0
516.0
547.0
574.3
2
Growth vs. Prior Year
?8.1%
?10.3%
?6.0%
?5.0%
3
Cost of Goods Sold
?(313.6)
?(345.7)
?(366.5)
?(384.8)
4
Gross Profit
154.4
170.3
180.5
189.5
5
?Selling, General,? & Admin.
?(93.6)
?(103.2)
?(109.4)
?(114.9)...
Assume perfect capital markets. Since the debt claim is senior to the equity claim, debt is...
Assume perfect capital markets. Since the debt claim is senior
to the equity claim, debt is cheaper than equity. Therefore, a
simple strategy to reduce the cost of capital would be to take on
as much debt as possible. DISCUSS this claim concisely.
Assume that annualized yields of short-term and long-term securities are equal. If investors suddenly believe interest...
Assume that annualized yields of short-term and long-term
securities are equal. If investors suddenly believe interest rates
will increase, their actions may cause the yield curve to
Group of answer choices
a.be unaffected.
b.become flat.
c.become upward sloping.
d.become inverted.
1. A(n) ________________ mutual fund invests funds in short-term securities like Treasury bills, jumbo CDs, and...
1. A(n)
________________ mutual fund invests funds in short-term securities
like Treasury bills, jumbo CDs, and commercial paper.
A. REIT
B. hybrid fund
C. closed-end investment
company
D. equity mutual fund
E. money market mutual fund
2. A(n)
__________________ has customer demand for the shares determining
the number of shares outstanding.
A. general
partnership
B. limited partnership
C. open-end
D. REIT
E. closed-end
3. A no-load mutual
fund:
A. has zero
operating expenses.
B. is typically marketed directly to
customers,...
Assume that yields on U.S. Treasury securities were as follows: TERM RATE 6 months 4.15% 1...
Assume that yields on U.S. Treasury securities were as
follows:
TERM RATE 6 months 4.15% 1 year 5.36 2 years 5.54 3 years 5.76 4
years 5.90 5 years 6.10 10 years 6.35 20 years 6.67 30 years
6.72
a. Select a correct yield curve based on these data.
b. What type of yield curve is shown?
c. What information does this graph tell you?
d. Based on this yield curve, if you needed to borrow money for
longer than...
Assume a two-period world, perfect certainty, and perfect capital market. A firm has an initial endowment of $75 million. The firm has identified the following available investment opportunities:
Assume a two-period world, perfect certainty, and perfect capital market. A firm has an initial endowment of $75 million. The firm has identified the following available investment opportunities:ProposalPeriod-0 OutlayPeriod-1 ReturnK$9.77 million$10.63 millionL$10.82 million$13.21 millionM$13.63 million$15.81 millionN$12.12 million$14.25 millionR$19.26 million$21.76 millionThese are not divisible projects, which cannot be invested in a fraction (the firm must invest 100 percent of each proposal or none of it). Assume that the average market rate of return is 12.8 percent.(i) Which projects will the firm...
The FOMC has instructed the FRBNY Trading Desk to purchase $450 million in U.S. Treasury securities....
The FOMC has instructed the FRBNY Trading Desk to purchase $450
million in U.S. Treasury securities. The Federal Reserve has
currently set the reserve requirement at 9 percent of transaction
deposits. Assume U.S. banks withdraw all excess reserves and give
out loans.
a. Assume also that borrowers eventually return
all of these funds to their banks in the form of transaction
deposits. What is the full effect of this purchase on bank deposits
and the money supply?
b. What is...
The FOMC has instructed the FRBNY Trading Desk to purchase $820 million in U.S. Treasury securities....
The FOMC has instructed the FRBNY Trading Desk to purchase $820
million in U.S. Treasury securities. The Federal Reserve has
currently set the reserve requirement at 5 percent of transaction
deposits. Assume U.S. banks withdraw all excess reserves and give
out loans.
a. Assume also that borrowers eventually return
all of these funds to their banks in the form of transaction
deposits. What is the full effect of this purchase on bank deposits
and the money supply?
b. What is...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- 38. A contract with an illegal principal objective is typically which of the following? Answers: A....
- Explain how advances in technology can force a software subsystem to undergo change or run the...
- Discuss whether you agree or disagree on whether you think E-mails need to be managed and...
- b. Do any unions represent employees in Microsoft? Describe which unions are involved. c. Have there been...
- Look up and use each of these Linux commands. (Each command will have two parts) Summarize...
- What was Lincoln 10 percent plan and what problems did it present?
- A cantilever beam 4m long carries a uniform load of 3.5 kN/m over a portion 1.5m...
ADVERTISEMENT