Wrigleys Dual-Class Equity Strategy
Wrigley’s Case
Question 1) a) There were 199,230,000 shares of Common stock. The board declared a 1 for 4 Class B stock dividend. So there were 4,980,750 shares of class B stock distributed to common shareholders. And there were 33,211,000 shares of class B shares outstanding of which those shareholders received a 1 for 4 dividend also; which would be 8,302,750 shares of class B distributed. Total shares of class B shares given as a dividend are 13,283,500. Value is 13,283,500 x .0669 = $888,666.15
Contributed Capital + Earned Capital
+888,666.15 -888,666.15
b) The outstanding shares of 2,222,000 would now be 3,110,666. Contributed capital would increase and retained earnings would decrease.
Question 2) I found out that on average, managers and directors own an average of 26.7 percent of the cash flow rights and 50.7 percent of the voting rights among firms in dual-class. Dual-class firms rely more heavily on debt financing, possibly because investors do not wish to buy stock with inferior voting rights. The median debt-to-assets ratio for dual-class firms is 0.21; for single-class companies it is 0.09.
Managers are willing to pursue more rapid growth. Increased cash flow ownership increases capital expenditures and growth in advertising and R&D spending, and firm value increases until managerial ownership of cash flow reaches about 33 percent. Increasing managerial control apparently has the opposite effect, perhaps because "some firms adopt dual-class structures when their original owners are reluctant to cede control" and seeking capital typically dilutes control. As a result these firms are less likely to tap the capital markets, typically invest less, grow more slowly, and have lower valuations.
Question 3)
Some people dislike companies with dual-class share structures, but the idea behind it has its defenders. They say that the practice insulates managers from Wall Street 's short-term mindset. Founders often
Question 1) a) There were 199,230,000 shares of Common stock. The board declared a 1 for 4 Class B stock dividend. So there were 4,980,750 shares of class B stock distributed to common shareholders. And there were 33,211,000 shares of class B shares outstanding of which those shareholders received a 1 for 4 dividend also; which would be 8,302,750 shares of class B distributed. Total shares of class B shares given as a dividend are 13,283,500. Value is 13,283,500 x .0669 = $888,666.15
Contributed Capital + Earned Capital
+888,666.15 -888,666.15
b) The outstanding shares of 2,222,000 would now be 3,110,666. Contributed capital would increase and retained earnings would decrease.
Question 2) I found out that on average, managers and directors own an average of 26.7 percent of the cash flow rights and 50.7 percent of the voting rights among firms in dual-class. Dual-class firms rely more heavily on debt financing, possibly because investors do not wish to buy stock with inferior voting rights. The median debt-to-assets ratio for dual-class firms is 0.21; for single-class companies it is 0.09.
Managers are willing to pursue more rapid growth. Increased cash flow ownership increases capital expenditures and growth in advertising and R&D spending, and firm value increases until managerial ownership of cash flow reaches about 33 percent. Increasing managerial control apparently has the opposite effect, perhaps because "some firms adopt dual-class structures when their original owners are reluctant to cede control" and seeking capital typically dilutes control. As a result these firms are less likely to tap the capital markets, typically invest less, grow more slowly, and have lower valuations.
Question 3)
Some people dislike companies with dual-class share structures, but the idea behind it has its defenders. They say that the practice insulates managers from Wall Street 's short-term mindset. Founders often