Finance and Company

1383 WordsJun 21, 20116 Pages
Running Head: THE WM. WRIGLEY JR.COMPANY CASE STUDY THE WM. WRIGLEY JR.COMPANY: CAPITAL STRUCTURE, VALUATION AND COST OF CAPITAL Situation Aurora Borealis LLC is a hedge fund that has around $ 3 billion under management and they are currently targeting William Wrigley Jr. Company to make their next investment. William Wrigley Jr. Company is the biggest chewing gum manufacturer in the world and it has no debt yet. Aurora Borealis is trying to convince Wrigley to do a…show more content…
The EBIT is $527,366,000 and interest expense is $390,000,000, so the earnings before tax is 137, 366,000 and with a tax rate of 40%, the net income will be $82,419,600(137,366,000-137,366,000*0.4). The EPS equals $82,419,600/179,220,203=$0.46. After the recapitalization, with a 169% debt/assets ratio, the EPS decreased from $1.61 to 0.46. In this case, with the higher leverage the EPS would not decrease because the debt/asset ratio is way too high and the debt should not exceed the assets by much, additionally the firm’s risk will increase as well. Impact on cost of capital The weighted-average cost of capital before the recapitalization is 10.9%. WACC= Wd (1-T) Rd +We Re, because the company doesn’t have debt before the debt portion of value of company is 0%, cost of debt rate is 0%, and the cost of equity is 10.9%. After recapitalization, if If the company chooses to pay a dividend, the Wd will be 18.63% (3,000,000/ (13,103,000+3,000,000)*100%), the WACC will be 10.32% (18.63% (1-40%)*13%+81.37%*10.9%). If the company chooses to repurchase the stock, the WD will be 22.89% (3,000,000/13,103,000), the WACC will be 10.19% (22.89% (1-40%)*13%+77.1%*10.9%). Both 10.32% and 10.19% are lower than the WACC before recapitalization, which indicates that after the recapitalization the company will have a lower minimum rate of return for the company that it needs to earn on its investments to maintain its wealth. Impact on Voting Control If the
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