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Table of Contents Executive summary 3 Effects of a leveraged recapitalization 4 EPS 4 Financial Distress and Flexibility 4 Value to shareholders 6 Signalling effects 6 Conclusion and Recommendations 7 References 8 Appendix 9 (Appendix A) 9 Interest Coverage Ratio Calculations (Appendix B) 9 Optimal Capital Structure (Appendix B-2) 9 WACC 9 Exhibit 2.Earnings and per share amounts 10 Exhibit 6. Key industrial financial ratios 11 Exhibit 7. Capital market conditions 12 Executive summary This analysis is performed from an internal audit, analysing the pros and cons of a $3 Billion recapitalization. The Wm Wrigley Jr. Company is the biggest chewing gum manufacturer in the world and it is currently an unlevered firm.…show more content…
1 or lower indicates the company has insufficient funds to repay the debt. Generally, companies will only go forth with a debt issue if the interest coverage ratio is over 1.5 (Couch, 2012). In this case, the Wm Wrigley Jr Company had an annual growth in revenues of 10% and earnings growth of 9%. In 2001, the EBIT stood at $527,366,000 as shown in exhibit 7 (see Appendix A). Wrigley had an interest coverage ratio of 1.47 (see appendix ‘Interest Coverage Ratio calculations’) which is borderline and questionable regarding the company’s ability to repay loan interest. showing the ability to repay loan interest is borderline questionable. If we look at exhibit 6 (see Appendix), we can see that 1.47 is indeed between B and BB; non-investment grade; due in part because WACC has only increased by 0.001% (see appendix ‘WACC’). WACC should be decreased by leveraging, showing effects of an overall reduction in the cost of capital; thus optimising value and capital structure of the firm.source??? The WACC remaining virtually the same shows that equity and debt holders demand virtually the same amount of return after recapitalization. Therefore, recapitalization is a good move. Value to shareholders Before Recapitalization Dividend Repurchase Market value of equity 13,102,699 11,002,699 11,002,699 No. of shares outstanding 232,441

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