Wm. Wrigley Jr, Company Capital Structure
Wm. Wrigley Jr, Company Capital Structure
8/23/2013
8/23/2013
EFB340 Finance Capstone
Case Study 1
Group S3
Dat Bui (N8360928)
JeongHwan KWON (N8400822)
Honghu Ye (N8106258)
EFB340 Finance Capstone
Case Study 1
Group S3
Dat Bui (N8360928)
JeongHwan KWON (N8400822)
Honghu Ye (N8106258)
Table of Contents Abstract1
1.0 Introduction2
2.0 Analysis
Share price2
Weighted Average Cost of Capital2
Earnings per Share 3
Voting Control 3
EBIT Interest Coverage Ratio 4
Flexibility 4
3.0 Recommendation5
4.0 Reference List7
5.0 Appendix
Appendix 18
Appendix 29
Appendix 310
Appendix 412
Appendix 513
Appendix 614
Appendix 715
Appendix 816
…show more content…
This results in the Wrigley family maintaining control of 46.6% voting power in Wrigley. This provides the family is a main controller of the firm to make financial decisions. The voting control will not be changed by paying dividends. However, a share buyback will result in 51% control by the family. In the case of a dividend payment, there will be no effect on voting control due to the fact that the number of shares outstanding has not changed. (Refer to Appendix 4)
EBIT Interest Coverage Ratio
After the recapitalization, Wrigley interest coverage ratio stands at 1.47 (Refer to Appendix 5). This ratio puts it far below major competitors in the same industry and will severely limit the firm’s financial flexibility. The interest coverage is 4.6, 11.1 and 3.4 for Cadbury Schweppes PLC, Hershey Foods Corp and Kraft Foods, leaving Wrigley’s in a poor and high-risk position to finance future positive growth opportunities. According to key industrial financial ratios, Wrigley interest coverage ratio stands between B (1.0) to BB (2.2) (Refer to Appendix 9). According to Van Horne & Wachowicz, interest coverage ratio below 1.5 will give doubt about their ability to service the debt expense. (Chandra, 2008)
Flexibility
After recapitalization, financial flexibility of Wrigley would become insufficiency liquid to react of unexpected future cash flow and be
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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.
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