The Wm. Wrigley Jr. Company
The Wm. Wrigley Jr. Company: capital structure,
VALUATION and cost of capital Introduction: Blanka Doborynin a managing partner of AURORA BOREALIS LLC tries to initiate a research for a potential investment in Wrigleys. They are trying to recapitalize the firm. Wrigley’s which is 100% equity financed has a market value of $13,103,000,000 the question begins if it is totally equity financed is it running at its efficient level? Or Is it better to recapitalize the structure and thereby bring out more efficient operational levels. They are planning to get a debt of 3,000,000,000 using it to extract the profit out of the low risk (BBB) forecast that the company possesses. They are potentially investigating, if it is good to recapitalize is it right to repurchase the shares with the debt or to pay dividends with the entire debt. There are major changes that take place in the following list of questions given to us and the following answers are answered according to the questions order. The answers are tabulated below. | Dividends | Repurchase of stock | Outstanding shares | 232,440,000 | 183,686,000 | Book value of equity | $(1724) | $(1724) | Price per share | $48.63 | $61.53 | Earnings per share | 0.32 | 0.40 | Table 1: describes the effect of issuing debt and using the proceeds to pay dividend or to repurchase stock. The number of outstanding shares in Wrigley’s would vary only if the shares were to be repurchased. The number of shares remaining after the repurchase is 183,686,000 i.e. a change of 48,754 shares. The book value of equity is the difference between the book value of assets and the book value of liabilities.From ExhibitTN2 we come to know that the book value of equity becomes negative. Negative book value to equity should not be used for taking decisions in the business because it uses historical data. It does not say anything about the risks faced by the companies (negative book value does not mean a risky situation). Hence
VALUATION and cost of capital Introduction: Blanka Doborynin a managing partner of AURORA BOREALIS LLC tries to initiate a research for a potential investment in Wrigleys. They are trying to recapitalize the firm. Wrigley’s which is 100% equity financed has a market value of $13,103,000,000 the question begins if it is totally equity financed is it running at its efficient level? Or Is it better to recapitalize the structure and thereby bring out more efficient operational levels. They are planning to get a debt of 3,000,000,000 using it to extract the profit out of the low risk (BBB) forecast that the company possesses. They are potentially investigating, if it is good to recapitalize is it right to repurchase the shares with the debt or to pay dividends with the entire debt. There are major changes that take place in the following list of questions given to us and the following answers are answered according to the questions order. The answers are tabulated below. | Dividends | Repurchase of stock | Outstanding shares | 232,440,000 | 183,686,000 | Book value of equity | $(1724) | $(1724) | Price per share | $48.63 | $61.53 | Earnings per share | 0.32 | 0.40 | Table 1: describes the effect of issuing debt and using the proceeds to pay dividend or to repurchase stock. The number of outstanding shares in Wrigley’s would vary only if the shares were to be repurchased. The number of shares remaining after the repurchase is 183,686,000 i.e. a change of 48,754 shares. The book value of equity is the difference between the book value of assets and the book value of liabilities.From ExhibitTN2 we come to know that the book value of equity becomes negative. Negative book value to equity should not be used for taking decisions in the business because it uses historical data. It does not say anything about the risks faced by the companies (negative book value does not mean a risky situation). Hence