Finance and Debt Essay

769 WordsFeb 28, 20134 Pages
Tutorial 2 The Wm. Wrigley, Jr. Company (Part 1) In the first part of the tutorial, each group will present to the class a succinct and yet comprehensive discussion of the following issues relating to Wrigley. Students who do not belong to any group will be assigned to a group in this tutorial. Intra-group discussions will be facilitated in the second part of the tutorial. PART A Question #1: (J1, S1, PA1, PB1) Looking at the data provided to you in the case, without doing a detailed analysis, do you agree with Blanka Dobrynin’s view that Wrigley is not efficiently financed? Why? Discuss clearly the methods you will use to help you to arrive at your decision. Question #2: (J2, S2, PA2, PB2) What could possibly be the…show more content…
To make an advantages of such a debt financing feature, companies often use debt –financing feature While using debt may add pressure to a company’s ongoing operations as a result of having to meet interest-payment obligations, it helps retain more profits within the company compared to using equity, which requires the sharing of company profits with equity holders. Using debt, companies need to pay only the amount of interest out of their profits. Using equity, on the other hand, the more profits a company makes, the more it has to share with equity investors. To take advantage of such a debt-financing feature, companies often use debt to finance stable business operations in which they can more easily make ongoing interest payments and, meanwhile, retain the rest of the profits to themselves. Financial Leverage Using debt is also advantageous to existing owners because of the effect of financial leverage. When companies use debt to provide addition capital for their business operations, equity owners get to keep any extra profits generated by the debt capital, after any interest payments. Given the same amount of equity investments, equity investors have a higher return on equity because of the additional profits provided by the debt capital. As long as using debt doesn’t threaten the financial soundness of a company in times of difficulties, equity owners welcome certain debt uses to help enhance their investment
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