THE WM. WRIGLEY JR. COMPANY - Valuation

* If we want to use WACC method, one assumption must be met: this program will not change the debt-equity ratio of AirThread. Under LBO approach, it’s

General speaking, WACC is the rate that a company’s shareholders expect to be paid on average to finance its assets, and it is the overall required return on the firm as a whole. Therefore, company directors often use WACC to determine whether a financial decision is feasible or not. In this case, I will choose 9.38% as discount rate. The reason why I choose 9.38% as discount rate is because the estimated Debt/Equity is 26% under the assumptions by CFO Sheila Dowling, which is most close to 25% of Debt/Equity from the projected WACC schedule. There might be some flaws existing by using WACC as discount rate. As we know, the cost of debt would be raised significantly as the leverage increased. The investment will definitely increase the firm’s current debt. So, the cost of debt would not keep at 7.75%.

When analysts question a firm’s earnings quality, it raises concerns regarding under or over aggressive accounting practices that may be allowing the firm to manipulate the earnings. Earnings quality is defined as the strength of the current earnings in being used to predict future earnings and cash flows. Since earning quality is indicative of future performance, analysts are more likely to address issues that have substantial impact on the earnings quality. An issue arises when the nature of the earnings is questioned. While permanent earnings are part of normal operations, any irregular, one time earnings can skew the earnings, making the firm look more profitable than it is. This is due to the inability to recreate similar one-time transactions that will give rise to such numbers. Investors prefer predictable

This solutions manual provides the answers to all the review questions and end-of-chapter problems in Financial Management: Principles and Practice, by Timothy Gallagher. The answers and the steps taken to obtain the answers are shown. Readers are reminded that in finance there is often more than one answer to a question or to a problem, depending on one‘s viewpoint and assumptions. One answer is

10. What is the correct capital structure and weighted average cost of capital for discounting the investment’s free cash flow. Assume a 35% tax rate. A correct response requires that you define capital structure and Weighted Average Cost of Capital (WACC) with a formula. When defining a term with a formula be sure that all the variables are also defined.

Nevertheless, the use of the Optimal Capital Structure (OCS) is the right techniques to be used in order to acquire the right combination of debt and equity that can maximize the

In order to find the WACC, we need to find the cost of the components of the capital structure and their proportion in the total capital.

in which wd is the proportion of Southwest’s assets financed by debt, ws is the proportion of Southwest’s assets financed by equity, rd is the required return on debt, rs is the required return on equity, and T is Southwest’s marginal tax rate.

At first, WACC and CAPM was attempted to be used as a source of cost of capital. However, for WACC, there is no available proportion of debt and cost of debt for MW. For CAPM, no available data seems to support the acceptable

Most of the corporations calculate WACC for giving investors an estimate on profitability and for being able to weight future projects. We are presented with Boeing current bonds, which constitute the long term debt portion of capital, and with Boeing’s assets which constitute the equity portion of capital. No other weighted entities (such as preferred shares) are considered. The debt/equity ratio would help with the calculation of weights. Boeing would need to earn at least 15.443% return on its investments (including the 7E7 project) in order to maintain the actual share price.

Moreover, let’s calculate the Weighted Average Cost of Capital (WACC). And in order to calculate it we need to know the capital structure of the company. Knowing the capital structure of the

2. What were the yields on the two representative outstanding Heinz-debt issues as of the end of April 2010? What were they one year earlier?

William Wrigley Jr. Company is exploring whether it is optimal to recapitalise with taking on $3 billion of debt. Three options are revised; borrow and repurchase shares, dividend payouts or continue to function with full equity. Debt will provide a tax shield of $1.2 billion given the tax rate is 40%, this should increase the market share price to $61.53 per share. The viable method for the company is to utilize this debt to repurchase shares. The will not only increase Wrigley’s market value, via the debt shield, but also signal to market that management believes Wrigley’s is undervalued, something the dividend payment won’t achieve.

After all of this we also need to keep in mind the financing deals that they have made with the Patricorp Group of $312,500 In for 41% of the equity, and $625,000 in subordinate debt. That was the previous debt that I talked about in the previous paragraph. As of the current revenues of the company, and considering the actual payments needed to pay they need to continue to grow the company to keep up and service the debt they will inquire. It is critical that they are successful with the growth, so that they do not fault on their agreement and have to give up more equity in the company so that they can retain ownership.

L1 - Modigliani & Miller (1958) ‘The Cost of Capital, Corporation Finance and the Theory of Investment’