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.
| Book value of equity Don't use plagiarized sources. Get Your Custom Essay on in investors rsquo minds wilson rsquo s share buyback could be a signal that the com 602206 Get an essay WRITTEN FOR YOU, Plagiarism free, and by an EXPERT! Just from $10/Page | $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 year’s dividends | $9 million |
| Target debt/equity (market value) | 35/65 |
In investors’ minds, Wilson’s share buyback could be a signal that the company:
A. is decreasing its financial leverage.
B. views its shares as undervalued in the marketplace.
C. has more investment opportunities than it could fund internally.
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