The Wm. Wrigley Jr. Company Case Study Essay Example

structure almost remains the same (10.9 to 10.91). The reason for this change is the increase in Beta due to re-levering at the new debt level, which consequently brings the beta up to the same level at relevant debt ratios.

Hence although re-levering shows no effect on the value of the firm, the EPS rises and the stock price rises due to the repurchase. A possible explanation for this would be the decreasing financial stability of the firm and its ability to make profits in the future. Effect of recapitalization on Financial Indicators The effect of using the new debt to repurchase shares would result in a reduction in the number of outstanding shares and a decrease in book value by $3,222,250. We understand that the stockholders are mostly mature investors desiring gains from the growth of the firm, instead of short-term yields from dividends.

Wrigley’s share prices in the past have shown consistent growth against S&P500. The calculated price paid for stock repurchase is $62, which will be The EPS will increase to 1.97 from 1.61 due to a decrease in the number of outstanding shares. The debt interest coverage would decrease to 1.2, but this still keeps the company within acceptable industry standards from Standard & Poor's CreditStats. Moreover, other key financial ratios like Long-term debt/capital will still remain on the high end of the credit spectrum (A to AA).

Financial Flexibility

The dividend payout, in our view, is an ongoing commitment, as once the dividend is paid, stockholders expect at least the same dividends in the future. The reduction in dividends in the future may disappoint many of the stakeholders and the stock price may drop

significantly after an announcement or in anticipation of any such announcements. A share repurchase is a temporary phenomenon and the company remains more flexible in terms of its financial decisions in the future. Financial Stability Any adverse factors like loss in sales due to economic recession or sudden rise in prices may hit the bottom line of the company hard.

If the company is levered at those times, the effective WACC would become much higher because of the increased cost of equity due to re-levered WACC and cost of debt without the tax shield. Valuation by DCF and APV The value of the firm is $15. 3b by APV valuation as compared to $13. 6b by DCF analysis using the WACC after delivering. The difference in the analysis is because of the bankruptcy risk and agency costs which APV method is unable to realize. This risk is covered and evaluated by credit rating agencies by increasing the marginal cost of debt.

Decision on recapitalization

It will be favorable for hedge funds if the company re-levers itself to raise the price of the stock. But from the long-term growth prospective of the firm, the best policy would be to re-invest in the firm for growth in form of sales or pursuing more profitable acquisitions. The share buyback would although raise the price of the firm, but if control of the firm is not an issue of urgency and the management does not plan an appropriate utilization of the retained earnings and the new debt, then the company should refrain from adding on additional debt.

Moreover, using debt to payout the dividends would result in a decrease in the value of

the firm and hence the share price using the assuming market to be efficient.

Introduction

1. Interest rates lowest in 50 years.
2. Blanka, hedge fund manager, seeks profits from re-structuring the firm.
3. Wm. Wrigley Jr. is an unleveraged company that can undertake $3 Billion dollars.
4. Wrigley was the world's largest manufacturer and distributor of chewing gum.
5. Wrigley`s stock price had significantly outperformed the S Composite index.
6. Revenues grew at an annual compound rate of 10% (earning at 9%).

Conclusion

EPS Vs. P/S
Extraordinary Dividend Repurchase Stocks EPS $ 0.32 $0.40, P/S $48.61 $61.52
Value to Shareholders $61.52 $61.52

Company should give the debt money as dividends instead of re-purchasing the shares.