Recapitalization Strategy
Wm. Wrigley Jr. Company: A Recapitalization Strategy
Development Team:
Sam Posnick Emily Booth Alex Fabisiak Sam Zarat
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Scenarios
To create a successful recapitalization plan, the group analyzed multiple scenarios and determined the appropriate level of debt to issue for the William Wrigley Jr. Company (referred to as Wrigley). The chosen capital structure is based on efforts to minimize the Weighted Average Cost of Capital (WACC) while also reducing increases in the cost of equity. The following pertains to analysis performed at four proposed levels of debt. In the base case, the corporation increases its debt level to 3 billion dollars. In this situation, the cost of equity is 11.05% and the cost of debt is 13%. This creates a WACC of roughly 10.302%. Given the financial ratios pertinent to rating agencies, the corporation’s debt rating falls into the B to BB range and classifies as a junk bond. In the second case the group examined the cost of capital at 2 billion dollars in debt. In this structure, the cost of debt is 12% and cost of equity is recalculated to 10.678%. In this case, Wrigley’s debt rating is somewhere between BB and BBB, falling short of investment grade. The overall WACC for 2 billion dollars of debt is 10.147%. In the third case, the group assumes that Wrigley issues only 1 billion dollars in debt. With 1 billion in debt, the cost of debt is reduced to 10.5% and the cost of equity to 10.37%. This creates an overall WACC of 10.06%. The calculated ratios based on 1 billion of debt leads to an estimated investment grade debt rating of A. In the last scenario, the group reviewed the current unlevered capital structure with no debt. In this case the WACC is 10.11%. Figure 1 (on page 2) provides a summary of the relevant financial ratios under each level of debt along with the corresponding rating range and estimated cost of debt. Furthermore, Figure 2 (on page 2) presents a recap of Wrigley’s beta, cost of equity, cost of debt, and
Development Team:
Sam Posnick Emily Booth Alex Fabisiak Sam Zarat
1
2
Scenarios
To create a successful recapitalization plan, the group analyzed multiple scenarios and determined the appropriate level of debt to issue for the William Wrigley Jr. Company (referred to as Wrigley). The chosen capital structure is based on efforts to minimize the Weighted Average Cost of Capital (WACC) while also reducing increases in the cost of equity. The following pertains to analysis performed at four proposed levels of debt. In the base case, the corporation increases its debt level to 3 billion dollars. In this situation, the cost of equity is 11.05% and the cost of debt is 13%. This creates a WACC of roughly 10.302%. Given the financial ratios pertinent to rating agencies, the corporation’s debt rating falls into the B to BB range and classifies as a junk bond. In the second case the group examined the cost of capital at 2 billion dollars in debt. In this structure, the cost of debt is 12% and cost of equity is recalculated to 10.678%. In this case, Wrigley’s debt rating is somewhere between BB and BBB, falling short of investment grade. The overall WACC for 2 billion dollars of debt is 10.147%. In the third case, the group assumes that Wrigley issues only 1 billion dollars in debt. With 1 billion in debt, the cost of debt is reduced to 10.5% and the cost of equity to 10.37%. This creates an overall WACC of 10.06%. The calculated ratios based on 1 billion of debt leads to an estimated investment grade debt rating of A. In the last scenario, the group reviewed the current unlevered capital structure with no debt. In this case the WACC is 10.11%. Figure 1 (on page 2) provides a summary of the relevant financial ratios under each level of debt along with the corresponding rating range and estimated cost of debt. Furthermore, Figure 2 (on page 2) presents a recap of Wrigley’s beta, cost of equity, cost of debt, and