The Wm. Wrigley Jr. Company Case Study

1352 WordsFeb 25, 20126 Pages
CAPITAL STRUCTURE, VALUATION, AND COST OF CAPITAL Executive Summary Aurora Borealis LLC is an activist Hedge fund. They are trying to buy a large stake in the company and thereby force the management to reorganize the capital structure by raising the debt and using it to pay the dividends or buy back the shares. The effect of restructuring on various financial parameters will be discussed in the concluding parts. Hedge Fund Strategy The buyback of shares would increase the EPS for the firm as a natural consequence of reduction in number of shares outstanding. The increase in EPS will signal towards a positive market sentiment, which would result in increase in share price. Also, raising debt at lower cost of debt i.e. at good…show more content…
Cash received N/A 3 B 0 Share price S 56.36 48.61 61.52 Value of shareholders S 56.33 61.52 61.52 Share Repurchase Calculation New Debt New Price Share Repurchase 3 Billion MV Equity + PV Debt Tax Shield 13.1 Billion + (3 Billion x 40%) = 1.43 Billion 1.43 B /232.441 M = $61.52 per Share 3 B /$61.52 = 48.764M Impact on Cost of Capital Before Recapitalization After Recapitalization Weight of Equity 100%* 77.22% Weight of Debt 0 22.78% Pre- tax Cost of Debt 13% 13% Beta .75 .869% Cost of Equity 10.9% 11.74% WACC 10.82% 10.84% Beta L= .75 (1+ ((1-40%)*(3 B/11.3 B)) = .869R EUL= 5.65% + .75 (7%) = 10.9%R EL= 5.65% + .869 (7%) = 11.74%WACC Before = 0 (1-40%) 13% + 100% (10.9%) = 10.82%* WACC After = 22.78% (1-40%) 13% + 77.22% (11.74%) = 10.84% RRF = 5.65%, MRP = 7% *Marginalizing Short-term debt Impact on EPS Capitalization status Worse Case Most Likely Best Case Before Recapitalization $ 1.19 $1.33 $1.46 After Recapitalization- No repurchase $0.19 $0.32 $0.45 After Recapitalization- Repurchase $0.24 $0.40 $0.57 Compare Price Per Share? Capitalization status Price per share Before Recapitalization $ 56.36 After Recapitalization- Repurchase $61.52 After Recapitalization- Dividend $48.61 Impact on Voting Control y • 189.8 M Common Shares ² 21%

More about The Wm. Wrigley Jr. Company Case Study

Open Document