William Wrigley Jr Case Study
EFB340- FINANCE CAPSTONE
Case Study 1- The William Wrigley Jr. Company: Capital Structure, Valuation, and Cost of Capital
Group: 4-4
ABSTRACT
This report examines the impact a $3 billion bond issue will have on the value of the William Wrigley Jr. Company. When analysing its various impacts, the expectations that arise as a result of the leveraged recapitalisation include an increase in the share price & cost of capital and reduced earnings per share. In essence, the potential benefits of a $3 billion bond issue are outweighed by the costs. Other potential impacts were considered and it was expected that the debt issue would lead to an increased agency cost of debt while voting control was not expected to change. The signal of a leveraged recapitalisation through a share repurchase should result in an increased share price and similarly, a recapitalisation through a dividend payout may put downward pressure on the share price when future dividend expectations are not met. Although Wrigley’s has the ability to service a $3 billion debt, it would lose financial flexibility due to interest payments. It is recommended that Wrigley’s issue $2 billion in debt resulting in an increased share price and reduced cost of capital among other benefits.
Table of Contents 1.0 INTRODUCTION 4 2.0 OUTLINE ALTERNATIVE SOLUTIONS TO THE PROBLEM 4 2.1 IMPACT ON SHARE PRICE 4 2.2 IMPACT ON WEIGHTED-AVERAGE COST OF CAPITAL (WACC) 5 2.3 IMPACT ON EARNINGS PER SHARE 5 2.4 OTHER CONSIDERATIONS 6 2.4.1 AGENCY COST OF DEBT 6 2.4.2 IMPACT ON VOTING CONTROL 6 2.4.3 SIGNALLING & CLIENTELE EFFECT 7 2.4.4 DEBT COVERAGE & FINANCIAL FLEXIBILITY 7 3.0 CONCLUSION 8 4.0 RECOMMENDATIONS 8 5.0 REFERENCE LIST 10 6.0 APPENDICES 12 6.1 APPENDIX 1 – Adjusted NPV (ANPV) 12 6.2 APPENDIX 2 – Stock Pricing 13 6.3 APPENDIX 3 – Black-Scholes-Merton Option Pricing Model (Put Option) 15 6.4 APPENDIX 4 – Black-Scholes-Merton Option Pricing Model (Financial
Case Study 1- The William Wrigley Jr. Company: Capital Structure, Valuation, and Cost of Capital
Group: 4-4
ABSTRACT
This report examines the impact a $3 billion bond issue will have on the value of the William Wrigley Jr. Company. When analysing its various impacts, the expectations that arise as a result of the leveraged recapitalisation include an increase in the share price & cost of capital and reduced earnings per share. In essence, the potential benefits of a $3 billion bond issue are outweighed by the costs. Other potential impacts were considered and it was expected that the debt issue would lead to an increased agency cost of debt while voting control was not expected to change. The signal of a leveraged recapitalisation through a share repurchase should result in an increased share price and similarly, a recapitalisation through a dividend payout may put downward pressure on the share price when future dividend expectations are not met. Although Wrigley’s has the ability to service a $3 billion debt, it would lose financial flexibility due to interest payments. It is recommended that Wrigley’s issue $2 billion in debt resulting in an increased share price and reduced cost of capital among other benefits.
Table of Contents 1.0 INTRODUCTION 4 2.0 OUTLINE ALTERNATIVE SOLUTIONS TO THE PROBLEM 4 2.1 IMPACT ON SHARE PRICE 4 2.2 IMPACT ON WEIGHTED-AVERAGE COST OF CAPITAL (WACC) 5 2.3 IMPACT ON EARNINGS PER SHARE 5 2.4 OTHER CONSIDERATIONS 6 2.4.1 AGENCY COST OF DEBT 6 2.4.2 IMPACT ON VOTING CONTROL 6 2.4.3 SIGNALLING & CLIENTELE EFFECT 7 2.4.4 DEBT COVERAGE & FINANCIAL FLEXIBILITY 7 3.0 CONCLUSION 8 4.0 RECOMMENDATIONS 8 5.0 REFERENCE LIST 10 6.0 APPENDICES 12 6.1 APPENDIX 1 – Adjusted NPV (ANPV) 12 6.2 APPENDIX 2 – Stock Pricing 13 6.3 APPENDIX 3 – Black-Scholes-Merton Option Pricing Model (Put Option) 15 6.4 APPENDIX 4 – Black-Scholes-Merton Option Pricing Model (Financial