Wrigley Jr Company Case

Assignment for Case 34: Wrigley Jr. Company

(3-points)

1. What will be the effects of issuing $1.3 billion of new debt and using these debt proceeds either to pay a dividend or to repurchase shares:

a. Wrigley’s shares outstanding (actual no. of shares)?

b. Wrigley’s book value of equity (actual $$$)?

c. the price per share of Wrigley stock (actual $$$)?

d. earnings per share?

e. debt interest coverage ratios (actual $$$)

f. voting control by the Wrigley family?

(2-points)

2. What is Wrigley’s current (prerecapitalization) weighted average cost of capital (WACC)? Note that Wrigley is unlevered (all equity financed). The Asset Beta and Equity Betas are equal when a firm is all equity financed (explained in the attached reference materials).

(4-points)

3. What would you expect to happen to Wrigley’s WACC if it issues $1.3 billion in debt and uses the proceeds to either pay a dividend or repurchase common stock?

(1-points)

4. Should Blanka Dobrynin try to convince Wrigley’s board of directors to undertake the recapitalization? Why or why not? On another note, is Wrigley’s the type of firm that Warren Buffett would be interested in? Why or why not?

Note: use Modigliani and Miller’s theory for this assignment (see Part II of Section III). This model is acceptable for moderate changes in debt

Wrigley Jr. Company

1.

* A) DECREASE

* B) DECREASE

*C) INCREASE

* D) INCREASE

*E) INCREASE

*F) INCREASE

2. CAPM= .0565 + .75(.056)

= .0985= 9.85%

*Since this company is all equity financed the WACC is equal to the cost of equity.

WACC= 9.85%

3. The change V = (0.40)($1.3 BILLION)

= $.52 billion

V = $13.103 Billion + $ .52 Billion {* E= price * number of shares outstanding}

= $13.623 billion

E= $ 13.623 Billion - $ 1.3 Billion

= $ 12.323 Billion

Debt= $ 1.3 B

Equity= $12.323 B

Total= $ 13.623 B

BETA FOR EQUITY ( B): .75[ 1 + (1-.40)(1.3 B/ 12.323 B)

= .7975

R = .0565 +...