The Wm. Wrigley Jr. Company

1767 WordsDec 5, 20128 Pages
The Wm. Wrigley Jr. Company: capital structure, VALUATION and cost of capital Introduction: Blanka Doborynin a managing partner of AURORA BOREALIS LLC tries to initiate a research for a potential investment in Wrigleys. They are trying to recapitalize the firm. Wrigley’s which is 100% equity financed has a market value of $13,103,000,000 the question begins if it is totally equity financed is it running at its efficient level? Or Is it better to recapitalize the structure and thereby bring out more efficient operational levels. They are planning to get a debt of 3,000,000,000 using it to extract the profit out of the low risk (BBB) forecast that the company possesses. They are potentially investigating, if it is good to recapitalize…show more content…
CONCLUSION: * Debt creates value; Debt creates Discipline. Stockholders will be happy that the managers of the firm are not wasting any money and working hard to pay for the interest expense for the debt holders; as a default brings the company to the brink of bankruptcy. In addition issuing debts will minimize or prevent any unwanted incentives giving room for the better growth of the company. * Signaling Issuing a debt is associated with signaling. According to pecking theory a firm issues debt if it has run out of internal investment which is not a very good sign. From the shareholders perspective this (recapitalization- repurchase of shares) will help in the increase of the value of the stock making them believe that the stock is undervalued. * The P/E ratio given in the case shows that Wrigley has a high P/E value 43.03(before recapitalization) compared to its competitor’s. From Exhibit 5 - and after recapitalization t the value of P/E increases a lot (when dividends are paid the P/E ratio is 151.96 and when shares are repurchased the ratio is 153.82 ). When high P/E ration, such scenario can take place 1-people tend to sell their shares off rather than keeping 2- Investors might not be attracted to the investment as, they consider it to be risky with respect to the growth rate of the * With respect to the firm size and the

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