Wrigley Jr. Company

1520 WordsOct 20, 20147 Pages
Table of Contents 1.0 Introduction 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. 2.0 Current Capital Structure Generally, firms can choose among various capital structures in order to maximize overall market value of the company. It is proposed however, that…show more content…
However, the issuance of debt can have signalling effects for investors. Generally, when firms issue debt it signals to investors that the firm is in a good financial situation as the firm is able to undertake repayments of future interest. Furthermore, the clientele effect can impact the stock price because it assumes that the investors are attracted to the company for its policies and when these change the investors will react and adjust their stock accordingly (Moles & Terry, 2005). In addition to this, the issuance of debt and repurchase of stock could signal to investors that managers believe the stock in undervalued. Despite this change in price, the Weighted Average Cost of Capital (WACC) will give a more accurate representation of what the change in capital structure implies for the firm, by taking account the costs of debt. 3.3 Weighted Average Cost of Capital Before recapitalisation Wrigley’s WACC was equal to it’s cost of equity (ke), which was calculated at 10.95%. After capitalisation it was found that Wrigley’s WACC decreased to 10.29%. This follows the general pattern of increasing debt resulting in a lower WACC. The cost of debt (kd) rate of 13% was used after we assessed the key industrial financial ratios and compared them with that of Wrigley’s (See Appendix 2) to conclude that it was in the range between the BB rate of
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