Maurice Tutor

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    Argosy University/ Phoniex University/
    Nov-2005 - Oct-2011

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  • Professor
    Phoniex University
    Oct-2001 - Nov-2016

Category > Accounting Posted 26 Sep 2017 My Price 8.00

Wilson Paper 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 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

$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

The most likelytax environment in which Wilson Paper’s shareholders would prefer that Wilson repurchase its shares (share buybacks) instead of paying dividends is one in which:

A. the tax rate on capital gains and dividends is the same.

B. capital gains tax rates are higher than dividend income tax rates.

C. capital gains tax rates are lower than dividend income tax rates.

Answers

Maurice Tutor
(5)
Status NEW Posted 26 Sep 2017 10:09 PM My Price 8.00

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