In investors’ minds, Wilson’s share buyback could be a signal that the company:
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 longterm 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 $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%
60 Learning Outcomes, Summary Overview, and Problems
part-i-07 13 January 2012; 10:21:1
Estimated full year earnings $25 million
Last year’s dividends $9 million
Target debt/equity (market value) 35/65
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.
Ans: B. views its shares as undervalued in the marketplace.
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