Wrigley Case Study
Introduction
The William Wrigley Jr. Company is the largest manufacturer and distributor of chewing gum, with a well consolidated market position. Due to new products and foreign expansion, its previous revenues have grown at an annual rate of 10% and its stock price regularly outperforms the S&P 500 as well the industry index. It is a conservatively financed firm with total assets of $1.76 billion and zero debt as of 2001.
The purpose of this case study revolves around how should they use a $3 billion debt issue to restructure its capital that would add the most value for the shareholders of Wrigley. The decision of how to use the debt will impact the firm’s stock price, cost of capital, debt coverage, earnings per share and voting control. The impact of these changes from the capital restructuring should be analysed to confirm that they are improving the value of the company and that they align with the company’s goals and strategic direction.
Share Value
When a firm goes through recapitalisation, the share value of the firm is affected. The effects on the share value depend on the type of recapitalisation undertaken. In the case of William Wrigley Jr. Company, the two proposed types are a dividend payout and a repurchase of shares. Financial managers are very careful in handling the choice of dividend policy of the company as dividends not only influence the value of the firm but more importantly the wealth of their shareholders (Bansal, Deepak, et. al).
Figures 1 and 2 below show the outcome of borrowing $3 billion worth of funds to leverage the company. Before Recapitalisation After Recapitalisation - Dividends After Capitalisation - Repurchase
Market Value on Equity 13.1 Billion 11.3 Billion 11.3 Billion
# Of Ordinary Shares 232.44 Million 232.44 Million 183.677 Million
Cash Received N/A 3 Billion 0
Share Price $56.36 $48.61 $61.52
Value to Shareholders $56.36 $61.52 $61.52
Figure 1
The tax rate of 40% causes the market value of
The William Wrigley Jr. Company is the largest manufacturer and distributor of chewing gum, with a well consolidated market position. Due to new products and foreign expansion, its previous revenues have grown at an annual rate of 10% and its stock price regularly outperforms the S&P 500 as well the industry index. It is a conservatively financed firm with total assets of $1.76 billion and zero debt as of 2001.
The purpose of this case study revolves around how should they use a $3 billion debt issue to restructure its capital that would add the most value for the shareholders of Wrigley. The decision of how to use the debt will impact the firm’s stock price, cost of capital, debt coverage, earnings per share and voting control. The impact of these changes from the capital restructuring should be analysed to confirm that they are improving the value of the company and that they align with the company’s goals and strategic direction.
Share Value
When a firm goes through recapitalisation, the share value of the firm is affected. The effects on the share value depend on the type of recapitalisation undertaken. In the case of William Wrigley Jr. Company, the two proposed types are a dividend payout and a repurchase of shares. Financial managers are very careful in handling the choice of dividend policy of the company as dividends not only influence the value of the firm but more importantly the wealth of their shareholders (Bansal, Deepak, et. al).
Figures 1 and 2 below show the outcome of borrowing $3 billion worth of funds to leverage the company. Before Recapitalisation After Recapitalisation - Dividends After Capitalisation - Repurchase
Market Value on Equity 13.1 Billion 11.3 Billion 11.3 Billion
# Of Ordinary Shares 232.44 Million 232.44 Million 183.677 Million
Cash Received N/A 3 Billion 0
Share Price $56.36 $48.61 $61.52
Value to Shareholders $56.36 $61.52 $61.52
Figure 1
The tax rate of 40% causes the market value of
References: 4. Denis, D. K. 2009. International corporate governance. Journal of Financial and Quantitative Analysis 38, Pp 1-36. 7. Pearson, G., Brown, R., Easton, S., Howard, P., and Pinder, S. (2009) Business Finance 10th Edition, McGraw Hill, pp323-324. 8. ‘Debt Capacity and Tests of Capital Structure theories’ (2010), Journal of Financial & Quantitative Analysis, 45, 5, pp. 1161-1187, Business Source Elite, EBSCOhost, viewed 21st August 2011. • WACC after Re-cap = 22.9%*((1-.4)*.13) + 77.1%*(.1174)