William Wrigley Jr. Company: Capital Structure

2) The higher ratio of Debt to Total Equity may result to the lower of the debt credit rating. The lower of the credit rating will result to increase of the interest rate which will cost more to the company.

Andrea Winfield considered issuing bonds was not a good option for financing the acquisition. She was particularly concerned about the increasing long-term debt and annual cash layout of $ 6.25 million for 15 years. We believe that her concerns are justified, because the Company had already significant amount of debt that could result in higher risks and stock price

However, two known authors in this field of study believe that companies with low business risk obtains factors of production at a lower cost which may also pave to the ability of the firm to operate more efficiently (Amit & Wernerfet, 1990). Therefore, many stockholders faced a high of uncertainty; this is because some companies do not have the financial strengths to cover its debts that even may result to bankruptcy.

The vice president of project finance at Marriott Corporation, prepares recommendations annually for the hurdle rates at each of the firm¡¯s three divisions. In this reflective case, the company¡¯s policies and strategies related with hurdle rates and cost of capital are discussed. In the above context, the company¡¯s policy of repurchasing its shares is also

The ownership structure for Bombardier not only gives the Bombardier family majority ownership of shares, but also superior voting power. Given that Class A shares have ten votes each and Class B shares have one vote each, the Bombardier family is deemed to control 54.35% of all the voting rights of both classes of common shares. This gives the Bombardier family ownership and control over the whole corporation. The non-controlling shareholders have insignificant voting power over the Bombardier family which may make it unfavourable to invest in the company.

Grand Metropolitan PLC is the world’s largest wine and spirits seller. It mainly operated in London, USA. In 1991, it beats market expectation with a 4.8% increase in pretax profits, and the company Chairman stated that company’s goal “to constantly improve on”. Despite the great performance in the world recession in 1991, the price of GrandMet shares was 10% below the average price/earnings ratio of the companies in the Standard & Poor’s 500 index. And more important, rumors had that GrandMet, valued at more than $14 billion in the stock market, maybe a takeover target. The management dilemma is to understand why the company’s stock is traded below of what considered being the right price and whether the company is truly

The key cases in this area are Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 and Gambotto v WCP Limited [1995] HCA 12. We must first consider which case applies. Allen requires that the power of the majority be exercised bona fide for the benefit of the company as a whole, and it applies when the alteration would affect all shareholders equally. In this case, Allen cannot apply as a conflict between shareholders exists on these facts, which attracts Gambotto regardless of the percentage of shares

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.

In June 2002 Blanka Dobrynin, a managing director of Aurora Borealis hedge fund, considers the possible gains from increasing the debt capitalization of The Wm. Wrigley Jr. Company. Blanka suggests Wrigley raise the amount of $3 billion in debt of the capitalization while Wrigley has been conservatively financed and remained no debt at the end of 2001. This report is aiming to analyze whether Wrigley should use $3 billion debt recapitalization to either pay dividends or to repurchase shares.

A general phenomenon about the corporations is that shareholders must accept majority rule in a company. Shareholders who own majority of the shares, feel that they have right to make majority of all decision because they have more at stake. Minority shareholder can also participate in company affairs by checking majority shareholders power, and promote transparency, ethical practices and good governance (OECD, 2004) but they are often regarded as an unnecessary burden a “dead weight” in corporation (Shkolnikov, 2006)

The purpose of the report is to understand the capital structure of the chosen company on the basis of the financial statements of the company which includes the income statement, balance sheet and the cash flow statement of the company and do the capital analysis of the company as well to find out the advantages and disadvantages in working capital of the company and suggest company logical and useful ways for growing their economy.

If the firms funding requirements are larger than their retained earnings, they must issue debt as this is preferred to issuing equity. Based on this theory, a firm’s financing policies could be viewed as signalling management’s view of the firm’s stock value (Wang & Lin 2010).Myers and Majluf (1984) also add that if firms issued no new securities but only used its retained earning to support the investment opportunities, the information asymmetric could be resolved. This suggests that issuing equity turn out to be more expensive as asymmetric information insiders and outsiders increase. Large firms should then issue debt to avoid selling under priced securities. As the requirement for external financing increases, businesses will work down the pecking order, from safe to riskier debt, perhaps to convertible securities or preferred stock, and finally to equity as a last resort. Each firm's debt ratio therefore reflects its cumulative requirement for external financing (Myers 2001).The pecking order theory clarifies why the bulk of external financing comes from debt. It also describes why organizations that are more profitable borrow less: since their goal debt ratio is, low-in the pecking order they do not have a goal since profitable firms have more internal financing available.

The basic principal relating to the administration of the affairs of a company is that “the will of the majority is supreme”. The general rule is that the decisions of the majority shareholders in a company bind the minority. 1 In a world that recognizes ‘simple majority rules’, minority shareholders of companies are by default vulnerable to oppression,

Nevertheless if companies operate in weak markets and fail to create growth and profit the concept of maximization of shareholder wealth is also an opportunity for self-regulation and security against threats for a company. This approach is in particular useful for safeguarding against difficulties arising from wrong or misguided leadership within a corporation. Shareholders of a company have the strongest interest in a company’s success because they often invest a lot of capital in the business and require revenues for their deposit (Moore, 2002). As a matter of fact, they become more

Harris and Reviv (1990) gave one more reason of using debt in capital structure. They say that management will hide information from shareholders about the liquidation of the firm even if the liquidation will be in the best interest of shareholders because managers want the perpetuation of their service. Similarly, Amihud and Lev (1981) suggest that mangers have incentives to pursue strategies that reduce their employment risk. This conflict can be solved by increasing the use of debt financing since bondholders will take control of the firm in case of default as they are powered to do so by the debt indentures. Stulz (1990) said when shareholders cannot observe either the investing decisions of management or the cash flow position in the firm, they will use debt financing. Managers, to maintain credibility, will over-invest if it has extra cash and under-invest if it has limited cash. Stulz (1990) argued that to reduce the cost of underinvestment and overinvestment, the amount of free cash flow should be reduced to