Wrigley Case

Wm. Wrigley Jr. Company

Topic: Capital Structure, Valuation, and Cost of Capital

I. Statement of The Problem

II. Alternative Solutions

III. Analysis of Alternatives

IV. Final Recommendations

V. Appendix

I. Statement of the Problem

Wrigley Co. is a well-known manufacturing company of chewing gum and has been so for many years. However the company’s valuation is weak and need restructuring. Therefore Blanka Dobrynin has been hired to solve the question: Does the company have enough financing and how much capital structure is needed to be efficient?

II. Alternative Solutions

1.) Should the company issue $3 billion of new debt to pay dividends or repurchase shares?

2.) Should the company not issue $3 billion of new debt?

III. Analysis of Alternatives

If the company issues the $3 billion in debt and uses it to purchase dividends or repurchase shares it affects the firms share values, cost of capital, debt rating, earnings per share, and voting control. In evaluating the firms share values, issuing the $3 billion in debt and using it to pay dividends, the firm’s number of outstanding shares will remain the same at 232,441,000. This is due to (11.3 billion/ 48.61 = 232.442 mil). This gives a repurchase price of $48.61, a decline from $56.36 before the new debt issued. In part this is due to the market value equity being 11.3 billion. If the debt is used to repurchase shares then number of outstanding shares will change. The outstanding number of shares will decrease to 183,686,000 from 232,441,000. The result comes from a repurchase price of $61.52 divided into $3 billion. Therefore it is best to purchase dividends if the new debt is issued, rather than repurchase shares.

In the terms of cost of capital issuing $3 billion of new debt will be the best option because it results in a lower WACC compared to the WACC before recapitalization. The WACC before recapitalization is 10.9%, where the WACC after...