The Wm. Wrigley Jr. Company: Capital Structure, Valuation, and Cost Capital.

Wm. Wrigley Jr. Company

Team Members

JOHN AGYARKO MBAE 11050170 GEORGE GARBRAH HOOPER MBAE 11050224 KOFI DANSO APPIAH RMBA 11060044 DOLORES MARIE B. GYADER RMBA 11060015 AUGUSTINE RASITO AKWETEA RMBA 11060175
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Presentation Outline
Introduction Central Issue Effect of Leverage Recapitalization on

Share Value Debt Rating Cost of Capital (WACC) Reported EPS Voting Control

Conclusion & Recommendation

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Introduction

Founder- William Wrigley Jr. Wm. Wrigley Jr. Company was founded in 1891 Initial Brands are Spearmint and Juicy Fruits Distributes to 180 countries and has 10, 800 employees Listed on the New York Stock Exchange under the ticker WWY

Wm. Wrigley Jr. Company

Introduction (Contd)

Blanka Dobrynin is a management Partner of Aurora Borealis Company (Hedge Fund Company) The company utilizes a strategy called active investors The strategy aims at affecting stock prices

Wm. Wrigley Jr. Company

Central Issues
The impact of $3.0 billion debt at 13%

per annum maturing after ten (10) years in Wrigley Company on the following?

Share Value Debt Rating Cost of Capital Reported Earnings per Share Voting Control and Aurora Borealis Companys (Hedge Fund Company) decision to invest in Wrigley Company.
Wm. Wrigley Jr. Company

Impact on Share Value

Value of Levered Firm

VL =Value of Levered Firm VU =Value of Unlevered Firm VITS =Value of Interest Tax Shield FCF1 = EBITD rEU = CAPM =Rf +B(Rm-Rf )
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Impact on Debt Rating

Current debt rating for Wrigley Company is between BB and B (This is an assumption from the case because the firm is not levered yet). Wrigley Company will move from an assumed rating of BB or B to a computed debt rating of AA. An AA debt rating will reduce the cost of debt of future borrowings.

Wm. Wrigley Jr. Company

Impact on Cost of Capital

rEL = Cost of Levered Equity r = Cost of Unlevered Equity

EU

rD = Cost of Debt MVD= Market Value of Debt MVE= Market Value of Equity
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Impact on Earnings Per Share

The primary goal of financial managers is to maximize the wealth of the shareholders.

The higher the EPS the better for shareholders wealth.

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Impact on Voting
Total Shares Outstanding 232,441,000

Ordinary Shares 189,800,000

Class B Shares 42,641,000

Others (79%) 149,942,000

Wrigley (21%) 39,858,000

Wrigley (58%) 24,731,780

Other (42%) 17,909,220

Voting Control For Wrigley Family Voting Control For Investors

46.60 % 34.79 % Wm. Wrigley Jr. Company

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Conclusion and Recommendation The deal is favourable

for Aurora Boraalis (hedge fund company) should Wrigley accept the debt proposal. This will increase the price to $292. But from the long-term growth perspective 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 do 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 decrease of the value of the firm and hence the share price using assuming market to be efficient.
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