The Wm. Wrigley Jr. Company

Issuing additional debt to finance the company expansion would worsen the company’s debt ratio as it is already more than average. The company envisions to be profitable by raising capital from existing stockholders by issuing common stock through rights offering.

The debt-to-equity ratio in 2003 and 2004 imply the company is also using more long-term debt from shareholder equity to run the company. In 2004, the balance sheet shows a jump in the number of share of common stock. The selling of more stock to pay for long term debt is not usually a good signal to investors. It may mean a corporation wants more cash to finance activities, which in conjunction with other figures could mean it is trying to offset some losses. A lower times interest earned ratio may also mean fewer earnings are available to meet interest payments and that the business is more vulnerable to increases in interest rates. This ratio has declined dramatically since 2002.

This condition always preferred by creditor in order to lend money. The lower the ratio, the higher the cushion against the creditors' losses in event of liquidation. And the creditor would have willing to lend more money to a company which has low debt ratio than the high one.

Large debt is a sign of action and that there is someone willing to lend to this company. Small amount of debt is the same can be good or bad. If there is enough cash flow there is no need for debt, but it may also be a sign of a company being stagnate or untrustworthy.

The key issue is what will be the expected EBIT next year and thereafter. If one assumes $514 million, the issuance of $3 billion in debt reduces the expected EPS from $1.33 to $0.41 with repurchase, or $0.32 with dividend. This results simply from increased interest expense and the variation in the number of shares outstanding. Clearly, shareholders should brace for much worse EPS results after the recapitalization.

This will enable the company to raise huge amount of funds by issuing bond. The main advantage is that the company is not required to pay principal until maturity time; risk involved in bond issue is less which will reduce the cost of loan (Www.boundless.com, n.d.). Debt financing will not dilute the ownership and any decision related to the company can be made fast without any intervention, company will have more independence to make reinvestment of entire profit earned into the future development of the business (Inc.com, n.d.). In this case, debt holders do not have any claim over the economic profits apart from the interest payment, and debt market is more efficient (Bradshaw, 2013). Fixed amount

We used 20% of equity value as the cost of financial distress. For measuring leverage, the case gave us book values as found on the balance sheet. The debt to equity can also be calculated using market values. The market value of debt is usually more difficult to obtain directly, since very few firms have all their debt in the form of bonds outstanding trading in the market. Using market value is more realistic as it takes into account prevailing conditions, which are relevant for the marginal decision. Since however that information is not available, we took the approach of assuming book value of debt is equal to market value. Even though the case mentioned that repurchases of stock at $30 per share and that interest rate is 14%, we know that as debt to equity ratio changes these figures will also change. As debt increases, interest rate will also rise, as investors require higher returns for increased risks. The share buyback should also boost earnings per share with should lead to an increased price.

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.

Lenders — especially long-term lenders — want reasonable assurance that the firm will be able to repay the loan in the future. They are concerned with the relationship between total debt and the economic value of the firm. This ratio is called the total debt ratio at market.

Equity accounts for 89% of Wrigley’s book value of capital before the recapitalization. But the book value per share is $5.49,[1] less than one-tenth of Wrigley’s current share price of $56.37. This huge disparity is the possibility that book values are backward-looking and ignore important economic considerations, such as the value of brands, intellectual property, and customer franchise as well as the debt tax shields.

There are a number of reasons that a company would forgo debt financing in favor of equity. The first is that debt financing increases the risk of the company. The cash flows that the company earns are allocated to debt re-service first, which reduces the amount of funding available to help the company expand. Additionally, there may come covenants attached to the debt that further restrict the ability of management to perform its duties in the manner it would prefer. Thus, the debt's restrictions may cause management to undertake activities that are not in the best interest of the shareholders, simply because those activities are in the best interests of the creditors.

Debt provides tax benefits is conditional to its’ financial engineering. To undertake debt, it increases the risk of insolvency (Altman & Hotchkiss, 1993). With the rejection of debt, the firm has at its disposal more equity in the future if positive NPV projects were to arise. This positions Wrigley to currently have financial flexibility and also endeavor to avoid financial distress. Repurchase Shares

Wrigley offerings include mostly consumable products which are the backbone force its consistent success. Now that the back story has been adequately explained, we will go into evaluating the financial leverage and liquidity of the Wrigley Company. If a firm wants to be profitable it must link key success factors with its key accounting policies. One of Wrigley’s key success

This is an indication that the company is becoming weaker and far from "self sufficiency". The company could do so debt-equity swap, an additional stock issue or selling assets to pay down some of the debt. Therefore the company use strategies depending on the conditions and how much the company want to improve its debt/asset ratio number.

A high debt burden increases the danger that goes bankrupt in the event that they settle on a poor business choice. Expanding dangers can build YTL Corporation's obligation interest instalments.