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

Nature of Wrigley’s business
William Wrigley Jr. The company is a global distributor and manufacturer of chewing gums. The
company finds out investment inadequacies, carry out corporate financing and valuation. The company
helps to restructure organizations with weak financing or unused cash and excess debt capacity compared
to the low business risks they face. It pressurizes managers and directors to accept more effective policies,
and with its healthy growth, it will get a significant gain on its investment. Concerning the repurchase of
shares, the outstanding share shrinkage may modify the impact of the control group. In several tax
situations, the company investors might have an inclination for the capital gains generated by repurchase,
but in dividend income, it is different with more aggressive taxation.
The effect of issuing $3 billion in new debt and using the proceeds to pay a dividend or to
repurchase shares on:
Market value per share
When the new debt is added, the price of Wrigley shares will fully and quickly reflect the
variations in the sensitivity of investors’ caused by the repurchase on disclosure of company intentions to
the public. One method of framing these issues is the change of stock price to look as follows:
Post recapitalization = prerecap. Equity value + present value debt tax shield
Equity value
= $56.37 + Tc × Debt
= $56.37 + 0.4 × $3,000
$61.53 = $56.37 + 1,200 or +$5.16/share.
The tax paybacks will be projected with the assumption that Wrigley keeps the $3 billion debt in
permanence. The revised net value for each share in Wrigley is $61.53.
Effect on number of shares
A recapitalization grounded on the dividend will most likely to have no influence on an overall
number of outstanding shares. However, when a repurchase is done, there will be a significant change in
the number of shares. If the current price of the stock is adjusted only for the estimation of tax profits, the
price of a repurchase will be $61.53. Wrigley Company has 232.4 million shares at present. Maintaining
that same price, 48.755 million outstanding shares would be repurchased with $3 billion for $61.53,
leading to 183.686 million outstanding shares.
Wrigley’s book value and market value of equity
The Wrigley book equity will go negative due to the big expense of the dividends or repurchasing
of shares. The Equity Market value will decline by $1.8 billion, the outcome of a $3 billion payout, which
is counterbalanced by the $1.2 billion tax shield debt.

Accounting and finance
Wrigley’s WACC:
Before the repurchase
Wrigley’s WACC before repurchase is around 10.9%. The equity costs assumes a 5.65% risk-free
rate for the 20-year U.S. Treasury ( Exhibit 7), a premium risk is anticipated to be 5% or 7%, and it
utilizes Wrigley’s existing beta of 0.75, Exhibit 5.
After the repurchase
The upsurge in the leverage will shake the company’s WACC in three main ways namely Cost of
debt, Beta, and capital weights. The company’s debt ratings will shift from AAA-no debt consistency to a
BB/B which reflects a risky situation. The post-recapitalization Wrigley rating is an issue of the decision.
By Comparison, Wrigley’s estimated outcomes to the yardsticks provided in Exhibit number 6 advocates
that BB/B could be the sensible call. Spinning to the yield by credit ratings provided in Exhibit number 7,
one may interpose between B (14.66%) and BB (12.73%) to derive the debt cost. The cost employed in
the part of this financial analysis will be 13%, which is Dobrynin’s decision. The earnings increase almost
linearly through the spectrum of investment-grade -AAA to BBB. However, they rise curvilinear at a
lower debt rate, which gives a hint of the issues that will emerge in the approximating cost of equity.
Wrigley’s present beta (0.75), can be Unlevered having the existing value of book debts and the
equity market value. This will give an estimated unleveraged beta of around 0.75, showing that Wrigley is
almost debt free. The 0.75 beta should be delivered to show the additional $3 billion debt. However, this
may not be a significant change. Firstly, Wrigley’s equity market value is so big that a $3 billion
recapitalization in debt will comparatively have an insignificant change in the company’s equity/ debt
ratio. Secondly, the opened formula of beta shows a linear model which interprets the tax shields of debt
but do not reflect the financial distress costs. The Capital weights built on debt book value and the equity
debt are considered previously as 22% debt and 78% equity. Finance theory and Best practice need the
employment of long-term objective weights in scheming Wrigley WACC. For simplicity sake and the
demonstration of the extreme changes, the balances for this note would assume a 22/78 proportion mix.
Effect of issuing $3 billion of new debt on earnings per share (EPS)
Exhibit number 8 provide a template for this analysis. The main issue could be the probable EBIT
the following year and afterward. If a $514 million is assumed, the injection of $3 billion debt will raise
the anticipated EPS to $0.41 from $1.33with the repurchase, or a $0.32 for the dividends. This effects will
simply come from the amplified interest cost and the deviation in the outstanding number of shares. It is
clear that the shareholders must expect a worse EPS consequence after Wrigley recapitalization. At a
$514 million EBIT value and more, the recapitalization will give a higher EPS value as compared to the
recapitalization based on dividends. A large area of research in various financial assessments proposes
that stockholders should go through the EPS in a company to make investment decisions based on the
cash flow.
Factors which should guide Wrigley’s to consider recapitalization and decide which is
the optimal method of recapitalization
Analysis recommends that recapitalization will give returns of 9%, however, this
percentage is not large enough just because the company is moderately valued highly
rich already. As provided in number 5, Wrigley Company operates at a price factor that
is far substantially larger compared to its competitors/peers? Recapitalizations in a
company have greater impacts on their value when that particular firm is operating at

Accounting and finance
the low values. Likewise, having knowledge of the larger asset value associated with
the debt, the financial distress’s costs will look negligible. Other special effects,
containing investment, clientele considerations, and signaling, are very difficult to
measure but perhaps balance off to a slightly positive list of concerns. The stated
earnings for every share will, therefore, be thinned considerably, however as I stated
above, EPS is not an adequate metric that guide the company financial decision-making
process. Considering such factors, it appears that the leveraged recapitalization is an
attractive idea.

Accounting and finance

References
Case Analysis: 34. Wm. Wrigley Jr. Company: the Capital Structure, Cost, and Valuation of
Capital (page 467).