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 company’s financial analyst. Wilson has a long-term record of gradually increasing earnings and dividends. Wilson’s board has also approved capital spending of $15 million to be entirely funded out of this year’s earnings.
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Book value of equity Don't use plagiarized sources. Get Your Custom Essay on
assume that wilson paper funds its capital spending out of its estimated full year e 602207
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$750 million ($30 a share) |
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Shares outstanding |
25 million |
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12-month trading range |
$25–$35 |
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Current share price |
$35 |
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After-tax cost of borrowing |
7% |
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Estimated full year earnings |
$25 million |
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Last year’s dividends |
$9 million |
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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 Wilson’s implied dividend payout ratio.
A. 36%.
B. 40%.
C. 60%.
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