Assignment

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 Shares outstanding 12-month trading range Current share price After-tax cost of borrowing Estimated full year earnings Last year's dividends Target debt/equity (market value) $750 million ($30 a share) 25 million $25-$35 $35 7% $25 million $9 million 35/65

Read the above story about Jane Wu, treasurer of Wilson Paper Company, Make sure you understand the context of the story and prepare to address questions about the story.
addressing the following questions:

a. Imagine that you are a large stockholder in the company. Would you rather see the $15 million be used for a special dividend rather than a buyback? Why or why not?

b. Imagine that you are a small stockholder in the company. Would you rather see the $15 million be used for a special dividend rather than a buyback? Why or why not?

c. Would it be smarter to pay off debt using the $15 million rather than executing a dividend or payback? Why or why not? Who would stand to benefit from the repayment of debt?

d. What is your recommendation as to do with the $15 million? Support your recommendation using what you have learned while in the class.