Janet Wu is treasurer of Wilson Paper Company, a manufacturer of paper products for the office and
Question:
Janet Wu is treasurer of Wilson Paper Company, a manufacturer of paper products for the office and school markets. Wilson Paper is selling one of its divisions for $70 million cash. Wu is considering whether to recommend a special dividend of $70 million or a repurchase of 2 million shares of Wilson common stock in the open market. She is reviewing some possible effects of the buyback with the companys financial analyst. Wilson has a long-term record of gradually increasing earnings and dividends. Wilsons board has also approved capital spending of $15 million to be entirely funded out of this years earnings.
Book value of equity | $750 million ($30 a share) |
Shares outstanding | 25 million |
12-month trading range | $25$35 |
Current share price | $35 |
After-tax cost of borrowing | 7% |
Estimated full year earnings | $25 million |
Last years dividends | $9 million |
Target debt/equity (market value) | 35/65 |
Assume that Wilson Paper funds its capital spending out of its estimated full year earnings. If Wilson uses a residual dividend policy, determine Wilsons implied dividend payout ratio.
Accounting concepts and applications
ISBN: 978-0538745482
11th Edition
Authors: Albrecht Stice, Stice Swain